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Invest or pay house off early?

A

Anarchist420

Diamond Member
What's the best thing to do?

I personally think the latter would be the wisest course of action especially if you have a somewhat normal (i.e., not super low like they are now) interest rate and/or low job security.
 
pay off house early. Most likely, even with the tax benefit, you are not going to get a rate of return, in this economy, as great as the reduction of interest expense by paying off your mortgage.

Additionally, there's nothing like the feeling of no debt.
 
depends. what is the apr on your mortgage. if that is lower than your expected returns then invest. if the return rate is lower than your mortgage rate, pay off first.
 
CPA said:
pay off house early. Most likely, even with the tax benefit, you are not going to get a rate of return, in this economy, as great as the reduction of interest expense by paying off your mortgage.

Additionally, there's nothing like the feeling of no debt.
Click to expand...

I wish I knew this feeling. 🙁 two more years before wife is done with grad school, then we start paying her student loans. argh.
 
Anarchist420 said:
What's the best thing to do?

I personally think the latter would be the wisest course of action especially if you have a somewhat normal (i.e., not super low like they are now) interest rate and/or low job security.
Click to expand...

<Dave Ramsey>
Would you take out a home equity loan to invest? That's your answer.
</Dave Ramsey>

Mathematically, if you can invest and earn a return that is greater than your mortgage interest rate (be sure to account for taxes too) then you should invest.
 
There's a few big reasons to invest over paying it early.

1) rates are at historic lows so total interest paid is very low, very easy to outpace it to provide higher net worth
2) deduction make it even lower
3) Inflation protected housing payment (payment is fixed so over time you're actually paying less)
4) Net worth isn't tied to a house, you have much more flexibility on what you can do with your money

Frankly, with rates this low there is simply no good reason to pay early.
 
CPA said:
pay off house early. Most likely, even with the tax benefit, you are not going to get a rate of return, in this economy, as great as the reduction of interest expense by paying off your mortgage.

Additionally, there's nothing like the feeling of no debt.
Click to expand...
Same here. No matter what the planners say. Paid off last year. ~$650/mo that I don't have to shell out. That's a lot of beer and wings.😛
 
blackangst1 said:
Invest. Id rather have a pile of cash at retirement and maybe a small remaining mortgage than no mortgage and less cash.
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But again, if you don't expect a rate of return greater than your overall mortgage interest, that's not a wise move.
 
Pay the house off early. You never know what may happen to cause other bills to pop up suddenly (medical, wife illness, child injury, etc.). With the house paid off you will have access to more funds that will be readily available.
 
spidey07 said:
There's a few big reasons to invest over paying it early.

1) rates are at historic lows so total interest paid is very low, very easy to outpace it to provide higher net worth
2) deduction make it even lower
3) Inflation protected housing payment (payment is fixed so over time you're actually paying less)
4) Net worth isn't tied to a house, you have much more flexibility on what you can do with your money

Frankly, with rates this low there is simply no good reason to pay early.
Click to expand...

1. The rate of return on investments is related to the risk free rate in the same way mortgages are so this is irrelevant.
2. You will pay taxes on investment income (assuming you have maxed out your 401k/IRA/Roth) so this is irrelevant as well.
3. Fair point but only against inflation that is not already priced into long term interest rates. Since the Fed's intervention in long term treasuries you could argue that long term rates no longer reflect inflation expectations.
4. True, you can get some diversification but you are adding leverage which increases risk.

IMO it only makes sense to invest first if you have a very long time horizon and/or haven't maxed out all your tax favored retirement accounts.
 
There are arguments either way. However, if your investment option is into some sort of tax advantaged retirement account (most typically a 401k) with employer matching you'd be insane not to max that out first. Even if they only match 10 cents on the dollar that's a 10% return on your money.
 
CPA said:
pay off house early. Most likely, even with the tax benefit, you are not going to get a rate of return, in this economy, as great as the reduction of interest expense by paying off your mortgage.

Additionally, there's nothing like the feeling of no debt.
Click to expand...

Learn how to invest. I'll take my 4% mortgage while getting much higher returns from investing the money instead. Not sure why people don't like money.
 
also, what if you pay off your house and its value crashes. which is why i think investment is the better choice.
 
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Lets assume we are talking about $100k in mortgage and have exactly $100k in cash, just so we have a baseline and talking about the same thing. We are assuming that if you had a crap interest rate, you'd refinance to today's rate.

If I were not 100% sure about my job, I would not invest OR pay off my house. $100k in cash would help you sleep at night knowing that you have one hell of a safety net to fall back on.

If I were 100% sure about my job and...

a) I were relatively young with a long time horizon to when you need the money (10+ years) - invest. Market returns aren't guaranteed, but given a long time horizon, they tend to do pretty well. Never, ever invest money that you'll need in a short time (less than 5 years).

b) I were older, getting close to retirement - either pay off the house or look for risk free returns (CDs, etc). The better option would be entirely dependent on unknown factors, so either one would be acceptable. Paying off the house essentially becomes a guaranteed rate of return equal to your interest rate minus any tax advantages you gain, but you lose liquidity. Personally, in this case, I would probably pay off half to three quarters of the house and keep the rest liquid until I had some more money to create a strong safety net.
 
1. Have you ever heard of someone who paid off their house and wish they hadn't? 🙂. 2. Have you met someone who made some bad investments and wished they had used that money to pay down their debt and house? 🙂. I know several number two. Never met or heard of number one.
 
Capt Caveman said:
Learn how to invest. I'll take my 4% mortgage while getting much higher returns from investing the money instead. Not sure why people don't like money.
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Some of us don't have 4% mortgages and can't get them at the moment (don't ask, it's not a credit thing). Also, 1-2% difference is just not begin enough to offset the feeling of a paid off mortgage. Plus, that extra principal can be used to easily make up the difference.
 
evident said:
also, what if you pay off your house and its value crashes. which is why i think investment is the better choice.
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and investments can't crash? Unless you're dealing with bond funds (which return a couple percentage points) the risk is just as significant with investing.
 
CPA said:
Some of us don't have 4% mortgages and can't get them at the moment (don't ask, it's not a credit thing). Also, 1-2% difference is just not begin enough to offset the feeling of a paid off mortgage. Plus, that extra principal can be used to easily make up the difference.
Click to expand...

If you can't tolerate risk then paying off your mortgage is a good move, however, I'd rather invest it, to make money.

Right before buying my current house, I was sitting on a bunch of money from selling my prior house. Instead of rolling it all into my new home(reducing my mortgage), I decided to invest it in the Visa IPO. Bought in at $45. Now, it's $115 and pays a quarterly dividend.

Bought a new vehicle last summer, I could have paid in cash but I'd rather take the 1.9% financing and keep my money in a mutual fund that had provided a 12% return in the last five years.

Instead of paying down my mortgage more quickly, I'd rather max out in my company's ESPP and get a minimum of a 15% return.

I have a home equity line of credit available, so I can borrow more money if I find a good investment opportunity.
 
CPA said:
and investments can't crash? Unless you're dealing with bond funds (which return a couple percentage points) the risk is just as significant with investing.
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The best decision always relies on unknown information. Both sides can argue "What ifs" all they want, but it's not productive and the best result can only be known after the fact. For every reason you would pay off your house, there is a reason to invest and vice versa.

With the tax advantages given to mortgages and the ultra-low rates right now, it's difficult to make a case for paying off the house if your have a long time horizon. At a 4% rate and in the 25% tax bracket (as many people are), you are looking at an effective mortgage rate of 3% (because you gain 25% of your interest paid back at tax time), which is a pretty low bar to jump in terms of returns.
 
Capt Caveman said:
I have a home equity line of credit available, so I can borrow more money if I find a good investment opportunity.
Click to expand...

I'm all for maxing returns, but personally I wouldn't touch the equity already in my home to risk on any investment. It's like doubling your bet while counting cards playing blackjack. Sure, you have a pretty good idea what's coming, but you don't know for certain, and eventually it'll catch up to you and bite you in the ass. You have to accept a certain amount of gains or eventually you'll just end up exactly where you started.
 
Invest -

if shit happens it will be difficult to qualify for a home equity loan to get the much needed cash you sunk into the place.

SPIDEY07 summed it up very well.
 
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