Pay off house or invest the $ ?

saddletramp

saddletramp

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Walla Walla. WA
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saddletramp
We are in the lucky position to have enough extra cash in our savings account to pay off our house. Our investment guy thinks we should put the money in our retirement account & continue to make our house payments.

His logic is that our mortgage interest rate is 3.5% & we could earn over 9% + if we invested the money.

We happen to live in a hot real estate market & according to Zillow our house appreciated $4,800 in the last 30 days. So our house seems to be a great investment.

We have no other debt & my wife & I feel like having our house paid off would make us feel very secure. After the mortgage is paid off we'd have another $1,700 a month to invest. There is no risk in paying off the house. Investing ALWAYS involves some risk.

I'm 61 years old, enjoy a real good income, & don't plan to retire for another 9 years.

What would you do?
 
Is that a fixed 3.5?

Also at 61 your investor is putting you into 9%+ investments, how risky are these? Personally at about half your age my spidy senses start to go off when people talk about returns that high.
 
From a math perspective, odds favor investing the money. However, you must be disciplined and not go out and buy another airplane/boat/car/vacation with the bucks.
 
James331 said:
Is that a fixed 3.5?

Also at 61 your investor is putting you into 9%+ investments, how risky are these? Personally at about half your age my spidy senses start to go off when people talk about returns that high.
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Fixed. Our mortgage is $1,700 a month. Presently, $1,000 a month goes towards principle. We don't need write offs...we own a glider business...believe you me...we have lots of deductions. LOL
 
I am debt free and I always encourage everyone to minimize their debt just as much as possible. I agree there is no risk to pay the house off. The 3.5% interest saved in the hand is better than 9% in the bush that is not guaranteed. Plus there is just so much freedom and mental peace when you have no debts to worry about.
 
Paying it off feels better and is a sure bet on the return.

Investing it makes financial sense as long as the market keeps bubbling. Oh, and it makes your investment guy money.
 
saddletramp said:
Fixed. Our mortgage is $1,700 a month. Presently, $1,000 a month goes towards principle. We don't need write offs...we own a glider business...believe you me...we have lots of deductions. LOL
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Is any of that 1700 escrow for hazard insurance and taxes ?
 
weilke said:
Is any of that 1700 escrow for hazard insurance and taxes ?
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Yes, includes insurance & taxes.

Since you're a fellow glider pilot. We are considering buying a PW-6 or Grob 103 to add a more high-performance two-place to our fleet. We'd pay cash.
 
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Pay off the house. And after you pay for the mortgage burning party invest your former mortgage payment, as you indicated you were considering. Nobody knows what tomorrow has in store, and what you are thinking is prudent.


Walla Walla is a hot housing market? :eek: Hooowuddaguest. :D
 
saddletramp said:
We have no other debt & my wife & I feel like having our house paid off would make us feel very secure.
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But you still don't really own it, right? If you stop paying taxes on it it will be taken away from you. A lot of people over here have had to move out of their "paid-off" homes recently because the house values (and taxes) tripled in the last 10 years.

So all you're really doing is putting some money down to decrease (but not eliminate) your house payment.

With that in mind... do you think it is still a good investment at 3.5% ? That's up to you, but just don't think you're going to own something that can't be taken away from you.
 
Pay it off.

There's nothing like the freedom you feel with no mortgage debt. It actually causes you to be able to invest more and take more risks. That's my exact experience.

Don't do the math, this is not a spreadsheet worthy exercise. It goes beyond financial math. Kind of like owning a plane.

Your money is supposed to give you freedom. Make it free you up now, while you can still breathe.
 
Yes, Walla Walla is a booming market. The wine business here is the main reason. 150+ wineries.

I hear about it all the time since I'm married to a wine maker.
 
So...I have never understood the logic of comparing the interest rate on a loan to a growth rate on investments. They’re complete opposites (spend va earn).

Pay off the house. Then invest the former mortgage. You’ll wind up cash ahead anyway.
 
SkyHog said:
So...I have never understood the logic of comparing the interest rate on a loan to a growth rate on investments. They’re complete opposites (spend va earn).
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It is opportunity cost. Owning your house costs you 3.5% interest on the mortgage. Investing probably earns you twice that amount (I'll call it 7% long term). So, if you invest $1,000 at 7% vs paying the mortgage down at 3.5%, you're netting 3.5% more on your $1,000. I'm not familiar enough with the new tax laws, but the after tax difference would likely be less than 3.5%, because you'd get to write off the interest on the house, and you'd ultimately have to pay taxes on the profit from your investments, but you're still likely to come out ahead financially by investing vs paying down the mortgage.
 
Pay off the house. Do you want to write off the interest or not need to write off the interest because there is no interest to pay?
 
455 Bravo Uniform said:
There's nothing like the freedom you feel with no mortgage debt. It actually causes you to be able to invest more and take more risks. That's my exact experience.
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Mine too. Yeah, you don't really own it, but without a mortgage payment the taxes aren't that hard to pay, at least they shouldn't be if you were able to qualify in the first place. Besides, even if you still had the mortgage, you would be paying property taxes.
 
kyleb said:
It is opportunity cost. Owning your house costs you 3.5% interest on the mortgage. Investing probably earns you twice that amount (I'll call it 7% long term). So, if you invest $1,000 at 7% vs paying the mortgage down at 3.5%, you're netting 3.5% more on your $1,000. I'm not familiar enough with the new tax laws, but the after tax difference would likely be less than 3.5%, because you'd get to write off the interest on the house, and you'd ultimately have to pay taxes on the profit from your investments, but you're still likely to come out ahead financially by investing vs paying down the mortgage.
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Let's put some real numbers here for a $300k house cash vs. 3.5% mortgage + 7% investment:

Buy cash:

a) Buy a house for $300k cash
b) Let's say your house triples in value over 30 years
c) Your net worth after 30 years is $900k

vs. invest:

a) $300k loan over 30 years at 3.5% costs in total: $484k
b) Take the $300k cash and invest it at 7%, then start to immediately draw down from it to pay for mortgage
c) After 30 years you'll have $791k left in (b)
c) House triples in value to $900k
d) Your net worth after 30 years is $1.69m

This only works if you actually DO the investment...
 
Pay off the house....the stock market is just too high right now, it is due for a correction....the housing market is also too high and due for a correction. We are all doomed. At least you already own the house, or most of it.
 
The general advice from professionals, based on what I've read, is that you should invest the money into your retirement account. That being said, I'd pay off the house.

deonb said:
b) Let's say your house triples in value over 30 years
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A house tripling in value? Good luck with that one. Maybe if you bought in the 80s and sold in 2007, but I doubt we'll see that kind of growth again anytime soon.
 
saddletramp said:
Yes, includes insurance & taxes.
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Make sure to account for that in your budget. Some of the payoff fanboys say 'the 1700 I don't have to pay to the bowler hat wearing banker I can now spend to live like noone else'. Well, 1000 is already going towards principal, so you are paying it to yourself. The $300 or so in RE tax and hazard insurance is still going to be there after you pay off. The only 'gain' from paying it off is the monthly interest charge.

Since you're a fellow glider pilot. We are considering buying a PW-6 or Grob 103 to add a more high-performance two-place to our fleet. We'd pay cash.
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Nice. I did some flying in a G103 twin III Acro. Coming from a K21 the control feel was like going to a single. Grob in German means 'rough' and the company was in the business of building assembly line equipment for folks like BMW. Some components on the G103 had more of a machinery than aircraft feel and the glasswork wasn't as clean as you would see from the competition. I don't recall any issues except that it could be a pain to line up the wings with a small crew. The club sold it for a DuoDiscus some years back. Are you planning to use it for aerobatic instruction ?
 
You didn’t say how many years are left on the mortgage. I have no idea if it matters but I’m curious.
 
I would pay off the house, too.
There is a "correction"/downturn in Equities due soon.
 
I'm all for reducing debt, but 3.5% vs the 17% my market investments made in the last 12 months has me leaning against the grain here. Leaning...not all in. As mentioned though, if you pay off the mortgage you are guaranteed to save 3.5% but investments typically aren't guaranteed.

It's a nice problem to have!
 
Ok, I’m running off 3 hours sleep so maybe I’m being stupid, but if you’re making decent money still, isnt that 3.5% actually more like 2.5% after the tax relief? I feel like I’m probably missing something, but I can’t see it. As opposed to the tax hit you’d pay on the earnings of the investment.

I’m a huge anti debt believer, but I have a hard time justifying paying off the primary residence.
 
If you paid off the house and invested the $1700 each month, would you be investing in a tax deferred plan? That could make a difference in your decision as well unless you are already contributing at the limit.
 
No right answer, but assuming you can be disciplined, I’d invest it.

Your effective yield is the difference between your current rate and what you can earn with reasonably stable investments.

My top yields are currently in AT&T (5%), Ford (4.5%), Verizon (4.3%), and Duke Energy (4%).

There is, of course, some risk in doing this that you would not have paying off your mortgage.

But...

1) The dollars used to pay your mortgage are themselves shrinking over time, at the inflation rate. In the far future they’ll be substantially “smaller”. In the unlikely event of hyperinflation, they’ll vanish almost entirely - though that would surely bring other problems.

2) While there’s always a risk of any given stock going down, there’s at least an equal chance that stock Inc a quality stock will go up, adding to your gains.

3) If you’re worried about current stock levels, put the money in a money market fund or the like and make monthly stock purchases of a set dollar amount. If you’re not aware of the concept of “Dollar Cost Averaging”, it’s easy to look up.


My relatively small mortgage is at 3.99%. At that rate I’d still invest rather than pay it off.

But like I said, no right answer. Ponder the pluses and minuses and do what’s right for you.
 
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SkyDog58 said:
If you paid off the house and invested the $1700 each month, would you be investing in a tax deferred plan? That could make a difference in your decision as well unless you are already contributing at the limit.
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You don't have $1700 to invest. You have $400 or $500 that you actually free up.

I understand the OP is already close to retirement. With the new law he may not even itemize his deductions so the old 'but your mortgage interest is tax deductible' thing doesn't make a difference anymore. Also, once you get close to mandatory minimum withdrawal age, 'tax deferred' isn't much of a deal to be had.

I would not deplete cash reserves to pay off a house. 140k in the bank can pay the mortgage for a long time if need be. If you put all the cash into the payoff, you still need to pay taxes and have a contingency fund to buy a new AC or to pay the nice man with a backhoe if the sewer line collapses.
 
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I will be a contrarian and say keep the mortgage and invest the money. Yes, there is more risk that way, at 3.5%, I see it as an easy choice. A properly diversified portfolio will be at least about safe as your home equity.

However, if the decision is too tough, then consider paying off half the mortgage. That way, more of your payment will be going towards principal and you will be earning higher rates of return with the other half.
 
Salty said:
Ok, I’m running off 3 hours sleep so maybe I’m being stupid, but if you’re making decent money still, isnt that 3.5% actually more like 2.5% after the tax relief? I feel like I’m probably missing something, but I can’t see it. As opposed to the tax hit you’d pay on the earnings of the investment.
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Absolutely correct. 2.5% is probably a reasonable guess at the effective interest rate, and 5.5% is probably a reasonable guess at the effective (A/T) investment growth. Net, you're 3% better investing over the long term.
 
Just had a similar conversation with my teenager yesterday to give her the idea of how to think about money.

If you pay off the house, and are able to continue to make the "mortgage payment" into your investment accounts, you may get the best of both worlds as you can likely put more into the investment post payoff.

Also agree with the previous poster, that it is relatively easy to be getting 14+% return.
 
weilke said:
You don't have $1700 to invest. You have $400 or $500 that you actually free up.
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Please explain.

I understand that sans mortgage, one still has to pay property tax and insurance annually out of pocket. Is that what you meant? Even with our mortgage, we choose to pay those ourselves rather than have it escrowed and paid by the mortgage holder.
 
FastEddieB said:
Please explain.

I understand that sans mortgage, one still has to pay property tax and insurance annually out of pocket. Is that what you meant? Even with our mortgage, we choose to pay those ourselves rather than have it escrowed and paid by the mortgage holder.
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He said that 1000 out of the 1700 is already paydown. So thats not money you 'get' as you were already paying it to yourself. Hazard and taxes is 200-300 a month and it will still be 200-300 after a payoff. The only thing you ditch is the interest portion of the mortgage.
 
A bit off topic, but from a biography of a Max Born the physicist:

14571594433_a38a81eccf.jpg


Shows how under hyperinflation debtors make out like bandits and creditors get shafted.
 
kyleb said:
Absolutely correct. 2.5% is probably a reasonable guess at the effective interest rate, and 5.5% is probably a reasonable guess at the effective (A/T) investment growth. Net, you're 3% better investing over the long term.
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3% on 140k is what he would effectively pay to sleep better at night knowing that he is debt free. That alone is worth something and if I was 61 I would do it in a heartbeat. Just pay the county and the insurance Co twice a year and be done with it.
 
inspectorpacket said:
Also agree with the previous poster, that it is relatively easy to be getting 14+% return.
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While I believe 14% is an achievable, if optimistic figure for the next few years, you can't rely on numbers like that lasting. There will be years when you have a negative return.

But 4 or 5% annual average is easily achievable and sustainable, which still beats the 3.5% mortgage interest. But still, a bad year or two will wipe that difference out quickly. That is why I recommended paying off half the mortgage and investing the rest.
 
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