Pay off Mortgage or Invest?

[Clevername]

First, yes I realize this is possibly not the best possible forum to bring this question to as it's based on the MMO gaming community. Yes, I realize a decent sized portion of the viewers of this forum are children under the age of 18 who have never had a mortgage. BUT, I have seen some very intelligent people come across these boards and welcome some constructive ideas. I have looked around the internet a bit and plan on seeing a financial adviser once I return stateside to further assist me though I'm think he/she may be biased towards the investing idea... anyway, enough of that preface I'll lay out my situation.

I started this job in 2010 with the goal in mind to pay off all existing debt then buy and pay off a house, boat and truck. I have paid off all existing debt, the boat and the truck and am starting the savings toward the mortgage but I began thinking; would I be better served with investing that money? The stats 207,000 / 4.25% / 30 year fixed. I don't really want investing advise but would prefer to hear the pros / cons to investing vs. paying off the mortgage. Also pertinent info, the job I currently do I will NOT continue after 2015 so I will take a serious pay cut when that happens. My mortgage right now is 1279/month with escrow and in 2015 I look to be making approximately 35k a year. I am single and do not play on having a wife or kids.

And go.

[conscript]

Go to the bank and ask them to calculate a payoff amount for your mortgage. Once you have that payoff figure ask them the amount of interest you will get if you open a savings account with the amount of money you have. Take those two figures and go to a financial adviser and discuss your options compared to the average rate of return they experience on investments. You need to figure out which of these options is going to give YOU the best rate of return, something that absolutely none of us on the internet will be able to tell you. Depending on the interest rate on a savings account or rate of return from investments you might be better off just keeping the mortgage, but that isn't something anyone is going to be able to tell you on here.

---------- Post added 2012-03-18 at 10:32 AM ----------

And for the love of god, whatever windfall of money you just came into, please, please pay the proper taxes on it first before you do anything else. People come into money all the time then they go out and pay off their mortgage, buy a car, etc. and then are absolutely fucked when the government comes knocking a couple months late asking for $75,000 or more.

[Deleted]

Yes this is a very odd place to be seeking financial advice

I'm a very conservative type when it comes to finances, so that'll colour my advice a fair bit.
If you go the investment route, you have to be earning more than the 4.25% you're paying in interest. Anything that can earn that rate of return is probably atleast a little bit risky. In a worse case scenario where your investment becomes worthless, you'd be paying a 15k a year mortgage on a 35k salary. Not fun. Safer investments like government bonds probably wouldn't earn enough money to be worth it over getting rid of that mortgage interest.
I don't know much about US taxes. I assume you get some sort of deductible on the mortgage interest, and that any investment income would be taxed at a low capital gains rate? So that makes keeping the mortgage a bit cheaper, but it also reduces the net return on whatever you invest in.

So yeah if I was in your situation and didn't forsee the need for more spending in the future I'd definitely clear the debt first.

[Deleted]

1. Investing means that not only will your possibly make some returns on the investment, but that it can be converted back into cash to increase your liquidity. Paying off the mortgage means that you can't get that "money back" if you really need it - without selling your house.

2. Without considering the issue of liqudity, paying down your mortgage is essentially the same as a "risk-free investment" at 4.25%. It's impossible to get those risk-free rates by actually investing.

3. Trying to achieve returns higher than 4.25% will include considerable risk, while paying down the mortgage doesn't include any risk of "losing". Those mortgage interest rate savings are guaranteed, returns on investmens are not.

[Deleted]

1. Investing means that not only will your possibly make some returns on the investment, but that it can be converted back into cash to increase your liquidity. Paying off the mortgage means that you can't get that "money back" if you really need it - without selling your house.

I thought about that. But couldn't he just take out another mortgage on the house if he really needed some cash? Only problem being that he might not get as good an interest rate.

[Bobdanjoe]

1. Invest to your cap in your Roth IRA.
2. Pay off your mortgage.
3. Repeat yearly until your mortgage is paid off.

I hope you've been capping your IRA up to this point...you never get those years back. Each year ends in April, so you can still make up last year's if you haven't yet.

Other than caps and matching employer matches for retirement, PAY OFF DEBT FIRST. Do not run with the fallacy created in the 80's, 90's and early 00's that says you're better off investing. We don't live in that world and that is a stupid way to live. Guaranteeing your return (no longer having a mortgage payment) versus possibly losing it all for a chance after tax incentives to make maybe 1-3% over your mortgage (you have to consider profits - interest payments to the mortgage company) is hella not worth it.

Refer to my list above for what to do with your leftover money. You'd be surprised how much 35k a year is when you don't have a mortgage or rent jumping down your throat each month. How much do you owe on your mortgage? Paying it off in 3 years or less is ideal if it's not pushing you too hard.

To all the youngins out there just starting out. Pay cash for your house if at all possible. Live in squalor to make it happen. Buy a small house that you can save up for in a year, maybe two with plans on saving up for a home that will support your family in a few years, if you plan on having one. Just my 2 cents.

[Deleted]

isnt buying a house an investment? its still an asset

[Deleted]

Pay off the mortgage, once this is done look for a second home you could start to rent / buy and move into it.
rent out the home you have paid the mortgage off with and use the income from that to buy / rent your second home.
This way it is both an investment (you have a home you could sell outright / use as capitol if needed) and paying off your debits.

[Bobdanjoe]

isnt buying a house an investment? its still an asset

It's a liability until you OWN it. When you take out leverage that is not an asset.

[Deleted]

1. Invest to your cap in your Roth IRA.
2. Pay off your mortgage.
3. Repeat yearly until your mortgage is paid off.

I hope you've been capping your IRA up to this point...you never get those years back. Each year ends in April, so you can still make up last year's if you haven't yet.

Other than caps and matching employer matches for retirement, PAY OFF DEBT FIRST. Do not run with the fallacy created in the 80's, 90's and early 00's that says you're better off investing. We don't live in that world and that is a stupid way to live. Guaranteeing your return (no longer having a mortgage payment) versus possibly losing it all for a chance after tax incentives to make maybe 1-3% over your mortgage (you have to consider profits - interest payments to the mortgage company) is hella not worth it.

Refer to my list above for what to do with your leftover money. You'd be surprised how much 35k a year is when you don't have a mortgage or rent jumping down your throat each month. How much do you owe on your mortgage? Paying it off in 3 years or less is ideal if it's not pushing you too hard.

To all the youngins out there just starting out. Pay cash for your house if at all possible. Live in squalor to make it happen. Buy a small house that you can save up for in a year, maybe two with plans on saving up for a home that will support your family in a few years, if you plan on having one. Just my 2 cents.

where are you living where you can buy a house in a year?

[Clevername]

1. Invest to your cap in your Roth IRA.
2. Pay off your mortgage.
3. Repeat yearly until your mortgage is paid off.

I hope you've been capping your IRA up to this point...you never get those years back. Each year ends in April, so you can still make up last year's if you haven't yet.

Other than caps and matching employer matches for retirement, PAY OFF DEBT FIRST. Do not run with the fallacy created in the 80's, 90's and early 00's that says you're better off investing. We don't live in that world and that is a stupid way to live. Guaranteeing your return (no longer having a mortgage payment) versus possibly losing it all for a chance after tax incentives to make maybe 1-3% over your mortgage (you have to consider profits - interest payments to the mortgage company) is hella not worth it.

Refer to my list above for what to do with your leftover money. You'd be surprised how much 35k a year is when you don't have a mortgage or rent jumping down your throat each month. How much do you owe on your mortgage? Paying it off in 3 years or less is ideal if it's not pushing you too hard.

To all the youngins out there just starting out. Pay cash for your house if at all possible. Live in squalor to make it happen. Buy a small house that you can save up for in a year, maybe two with plans on saving up for a home that will support your family in a few years, if you plan on having one. Just my 2 cents.

Yeah been contributing max to my employers matching for my 401K, I don't even figure that in to my earnings now to be honest. The way I think about it is if I just put that money out of my equation completely (as far as counting on it for retirement) then it makes my decisions now that much easier and more responsible.

@Conscript, I didn't just come into a windfall of money I just currently work a job where I make a good deal of money 130K approx after taxes BUT this job is very unstable and I will NOT work it past 2015.

[Bobdanjoe]

Minnesota. When people think of buying a house, I think they usually assume they're buying something really nice and big. If you're not buying in a prime historic/willing to live in a crappy area for a few years you can buy a 700sq ft house for cheap. Not to mention trailers (though they don't appreciate ever).

I'm not saying save up to live like a king. You do that later, when you're not giving the bank $600+ a month in interest alone.

---------- Post added 2012-03-18 at 03:28 PM ----------

Yeah been contributing max to my employers matching for my 401K, I don't even figure that in to my earnings now to be honest. The way I think about it is if I just put that money out of my equation completely (as far as counting on it for retirement) then it makes my decisions now that much easier and more responsible.

@Conscript, I didn't just come into a windfall of money I just currently work a job where I make a good deal of money 130K approx after taxes BUT this job is very unstable and I will NOT work it past 2015.

Excellent job man, that's the way to do it. Props to you, it took me a long time to not be a dumb ass and do that myself.

[Roose]

It's a liability until you OWN it. When you take out leverage that is not an asset.

Not necessarily true. Depends on where you live that determines who holds title. Some places have mortgagee get title on closing. Either way, you can usually usually use that home as collateral for a 2nd mortgage if needed. It is very much an asset.

Bottom line, money should go into real estate either way. Despite the bubble, real estate will always be in demand and in short supply.

My family has about 30 rental houses now. All but 1 is mortgage free. All income produced by those homes is now pure revenue with some minor insurance and tax costs.

Real estate is awesome!

[Bobdanjoe]

Not necessarily true. Depends on where you live that determines who holds title. Some places have mortgagee get title on closing. Either way, you can usually usually use that home as collateral for a 2nd mortgage if needed. It is very much an asset.

Though I agree with you and understand where you're coming from; it's very much broken. I'll never consider something I could lose in a whim an asset, but again I do understand what you're saying.

[applejuice007]

The advice I see in the thread seems very solid so far. Unless you can get more then the 4.25% while investing you will lose money in the end. After some rough number crunching my concern is that when you hit 35k ( I assume gross) in 2015 your mortgage payments seem like more then you comfortably afford. Considering you have insurance on the boat and truck it looks to me like you will be very tight. As it stands you probably would not have gotten the mortgage had the bank known your situation.

How long is the current term of your mortgage? And how much disposable income do you have at the moment? Ideally if you could pay it off before 2015 you should absolutely do it. 35k with no mortgage is, as was said, surprisingly a lot.

[Roose]

Though I agree with you and understand where you're coming from; it's very much broken. I'll never consider something I could lose in a whim an asset, but again I do understand what you're saying.

As do I what you were saying. A mortgage is a very very interesting financial tool. Depending on who you talk to they are either evil or a godsend. If you know how to use them properly they are great. If you get trapped by one they are awful, but it really is not the mortgage's fault. The payments are definitely a liability, but if you planned correctly you should never have to worry about making payments.

[Deleted]

I thought about that. But couldn't he just take out another mortgage on the house if he really needed some cash? Only problem being that he might not get as good an interest rate.

He probably can yeah.

Either way, paying down the mortgage seems like the smartest idea unless he is really going to need this money after 2015.

[Deleted]

I am horribly inexperienced, so I would take my own advice with that in mind - but avoid building a card house.

If you are to pay off (some of) your mortgage by investment profits, then you are going to have to make some good profits, I think. You can't be spending much in getting in and out of them, which means most of the money you invest will be locked, if the plan is going to work. Investments you can usually get out of at your own will - debt not so.

I think with investment you are either going to have to basically be lucky in finding some good thing to invest in or have your money locked in for a very long time to make enough profits for it to be worth the risk of a sort of circle funding that will fall if one of the links break off.

Getting the mortgage and interest down on it I would probably say would be your best bet, because of the risk of circle funding, the long nature of investing if you are make it worth the risk and the lower liquidity, and the instability of the global markets in these couple of years behind us and coming before us.

Now, I'm probably about to get evicted pretty soon, have never had a job and have had some other non-monetary things to fix, so take this with that. Am going to incur some debt I can try work off.

[Harvesting]

My first question to you is do you file your taxes "itemized"?

This would be the only reason to keep a mortgage, if you do not file itemized then you do not write off the interest from your mortgage. I would reccommend if you want to invest that you start a business that you control. Today's stock market is not based on vaule of the companies but if their stocks are moving, its volume over value imho.

Personally I prefer to have my debt paid off so that my income if just the MY income. I only have my 401k invested in the stock market, you would be suprised at how many opportunities there are for small businesses in any community. When I invest in any business, when I am the sole investor make sure you have control of the business. Typically LLC make sure you are listed as the manager so you control the destiny of your money.

Re-read posts I would not pay off your mortgage until after you stop working, use the tax write off until 2015, then when you quit and will not make enough money to file itemized then pay off your house. 4.5% from an investment is pretty easy to reach.