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Finance question

cnsaguy

cnsaguy

Diamond Knight
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Sep 18, 2002
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I owe about 230K on my house at 3.5% interest. I am in a position to pay if off if I wanted. Right now that money is in the market in mainly mutual funds.

Would it make sense to pay down the house and replenish the funds with the current amount of the mortgage payment? I'm thinking it's a 50/50 proposition given the low interest rate. Thoughts?
 
Pay off the house. It’s a big one time allocation to do it but you’ll then free up 15-25% of your income to start investing elsewhere or use that money for something else. That’s money you can start putting to work instead of paying 3.5% every month.
 
My worry is that the money is making more than 3.5% in the market. It would seem counterproductive to do that.

Don't plan on staying at the house more than 5 years either.
 
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cnsaguy said:
My worry is that the money is making more than 3.5% in the market. It would seem counterproductive to do that.

Don't plan on staying at the house more than 5 years either.
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Don't pay it off. If you've got enough cash to pay it off now then it isnt a potential burden on your cash flow. Put the money in something else, like you said, and you're coming out ahead. Not to mention the fact that interest rates are rising and you are likely locked in at 3.5%

The only thing to consider is your housing market. Its a separate issue, but if you are planning on selling in 5 years you may want to look at the fundamentals in your area. Knowing that rates are going up, the house is going to be worth less to a mortgagee than it is now.
 
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cnsaguy said:
My worry is that the money is making more than 3.5% in the market. It would seem counterproductive to do that.

Don't plan on staying at the house more than 5 years either.
Click to expand...

It's a complicated answer based upon your specific circumstances. One of which is age, your position in the market, and tolerance for risk.

Remember that the new tax law makes paying down debt more appealing from a tax perspective. Just assessing your question from a tax perspective can take a while since it's so complicated. Below are a few articles explaining why the capped exemptions for property related deductions and the much larger standard deduction make mortgage debt far less attractive.

https://www.marketwatch.com/story/p...be-the-smartest-investment-of-2018-2018-01-20
https://www.aarp.org/money/investing/info-2018/tax-law-pay-down-mortgage.html

I don't owe all that much on my house but I met with a tax advisor on this specific question a few months ago. They had to do a top to bottom assessment of my families' financial situation and tax positions. I came away choosing to pay off the remainder of the mortgage and rid myself of that 3.7% carrying cost.

You may wind up with a different answer. I think any answer is unique to the person and blanketed answers aren't useful.
 
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Echo 85 complicated decision. I’d max a purr of Roths presuming ur a poor like me who can. I sort of like low fixed rate interest debt in a rising interest rate environment. Sort of a basic capital allocation question presuming u really can’t think of a way to hurdle 3.7% after tax (hint u can bigly)... there’s ur answer. The rebuttal is “bro paying ur house off feels good” well sure but not all houses just go up and it’s a very specific location deal
 
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I'm at 4.375% rate. I've been doubling the payment and now debating on just paying it off. It is hard to guarantee a 4.375% rate anywhere without risk. I have to make 5%+ in the market to equal the same amount since I have to pay taxes on the gains.

My thoughts with the poster....pay off the house and enjoy being debt free. The market is on a 9 year streak so we could easily pull back from here.
 
KNIGHTTIME^ said:
I'm at 4.375% rate. I've been doubling the payment and now debating on just paying it off. It is hard to guarantee a 4.375% rate anywhere without risk. I have to make 5%+ in the market to equal the same amount since I have to pay taxes on the gains.

My thoughts with the poster....pay off the house and enjoy being debt free. The market is on a 9 year streak so we could easily pull back from here.
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Spot on general advice but I’d say people need to examine houses do have risks and both hard and opportunity costs people don’t consider
 
cnsaguy said:
My worry is that the money is making more than 3.5% in the market. It would seem counterproductive to do that.
Don't plan on staying at the house more than 5 years either.
Click to expand...
I have a '50% rule' here, along with other 'considerations,' and you're free to use them or disregard them.

My 50% Rule:
  • If the mortgage left is around (or less than) 50% of my liquid and non-penalty investments (basically everything outside of 401k or something with a penalty) ...
    • Pay off the house, otherwise ...
    • Keep paying loan at the same rate (don't bother paying off extra balance)
  • Remember, always consider the market could lose 50% value
    • It's a good idea to balance real estate against other investments -- again, my 50% rule
My Considerations:
  • If not paying it off, remember, there's no incentive to pay extra on your balance, considering ...
    • A bigger down payment makes the most difference on interest, or ...
    • Paying extra early makes the most difference, not later
  • Because if the bank repossesses at some point, it's all-for-not, that said ...
  • If you own your own outright, you can declare bankruptcy, and still have a place to live
    • This is the biggie for me
    • Especially if the market tanks, you at least have a home
  • That's in addition to the fact that you have no mortgage, no extra costs
    • Just your property taxes and insurance, which you'll usually now pay in-full for the year
Now, you're not planning to be in the house another 5 years. So I don't know what to tell you there. That kinda does throw a wrench into some of that logic.

But me? I'd still pay it off, using the 50% Rule. But that's just me. I might even stretch it to 60%, which I did back in the late '00s. It certainly made my life easier until we sold it nearly a decade later last year.

But if you're closer 75-80% of your liquid/non-penalty investments, that's too much of a chunk to give up. At $230K, that would mean you have $300K or less, leaving you with $70K or less liquid/non-penalty investments. I'd have at least $100K, if not $150K (closer to 60% rule).

Again, don't factor in 401K or anything that has penalties, of course.
 
1ofTheseKnights said:
Missed the not staying in the house 5 years... instant don’t pay off for me dawg. We’re due for a set back.
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Yeah, that's the wrench in the considerations. Although one has to wonder if the market or real estate will suffer more?

I'm thinking the market.

That's why I offered the 50-60% rule. He doesn't want to go all one way or another. But if he's got nearly enough to pay off his house twice over, then it is a good 'diversification' of assets.
 
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cnsaguy said:
I owe about 230K on my house at 3.5% interest. I am in a position to pay if off if I wanted. Right now that money is in the market in mainly mutual funds.

Would it make sense to pay down the house and replenish the funds with the current amount of the mortgage payment? I'm thinking it's a 50/50 proposition given the low interest rate. Thoughts?
Click to expand...
These budget buffetts ITT don't know shit about your situation and neither do I. How old are you, are you planning on staying in the house, what's your monthly cashflow, what do you have in retirement accounts.

A specific answer to any of these questions could change the advice.

The fact that you're asking for advice here leads me to believe you make poor decisions in life and that you need a CFP. That's the real answer.
 
fried-chicken said:
These budget buffetts ITT don't know shit about your situation and neither do I. How old are you, are you planning on staying in the house, what's your monthly cashflow, what do you have in retirement accounts.

A specific answer to any of these questions could change the advice.

The fact that you're asking for advice here leads me to believe you make poor decisions in life and that you need a CFP. That's the real answer.
Click to expand...

Can you ever be nice? Most CFP's just sell freaking products that pay them the most. I completely hated that industry. When CFP's are high 5'ing over a grandmother losing her husband, that is enough for me. Of course because they got to roll over an annuity to get another commission check. Most them had no real financial background and more of a salesmen. I would always recommend really controlling your own money. Just know what you're doing and the risks involved.
 
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I'll go Dave Ramsey on you. Would you borrow $230K to buy the same house if you didn't own it? Or would you invest $230K and only want 3.5% return? If no to either, then pay it off. Yeah, you lose the mortgage interest tax deduction. That's not worth paying 3.5% interest.
 
fried-chicken said:
These budget buffetts ITT don't know shit about your situation and neither do I. How old are you, are you planning on staying in the house, what's your monthly cashflow, what do you have in retirement accounts.

A specific answer to any of these questions could change the advice.

The fact that you're asking for advice here leads me to believe you make poor decisions in life and that you need a CFP. That's the real answer.
Click to expand...

Yea- that was already addressed earlier this thread like 5 times.

Maybe you’re already 10 beers deep
 
KNIGHTTIME^ said:
Can you ever be nice? Most CFP's just sell freaking products that pay them the most. I completely hated that industry. When CFP's are high 5'ing over a grandmother losing her husband, that is enough for me. Of course because they got to roll over an annuity to get another commission check. Most them had no real financial background and more of a salesmen. I would always recommend really controlling your own money. Just know what you're doing and the risks involved.
Click to expand...
Get a fiduciary then. No one ITT bothered to ask this dudes age and half of you are telling him to stay in stocks. No one knows his cash flow or his other retirement account balances. Every post is some formula for that may or may not apply to his situation so I'm giving the only piece of good advice in this thread. Find someone who understands your goals in life and ask them to help you get there.

These are all idiots here.
 
CommuterBob said:
I'll go Dave Ramsey on you. Would you borrow $230K to buy the same house if you didn't own it? Or would you invest $230K and only want 3.5% return? If no to either, then pay it off. Yeah, you lose the mortgage interest tax deduction. That's not worth paying 3.5% interest.
Click to expand...
I follow Dave Ramsey. No debt. Not even mortgage. I do use credit cards to get airline and hotel credit but pay off balances each month. Own 3 high end cars. Paid for all with cash. Have my own SEP retirement plan that allows me to put around $50k in each year. Also have some investments in land (not rent houses) and mutual funds. I'm very conservative fiscally. But I'm wide-eyed liberal in the sheets.
 
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CommuterBob said:
I'll go Dave Ramsey on you. Would you borrow $230K to buy the same house if you didn't own it? Or would you invest $230K and only want 3.5% return? If no to either, then pay it off. Yeah, you lose the mortgage interest tax deduction. That's not worth paying 3.5% interest.
Click to expand...

If you have a 3.5% loan on $230K mortgage and few other deductions, you might be at the standard deduction anyway. So if you make money on the investment side, you're paying taxes so that goes the other way too that you need to make more than 3.5% to equal the same net amount. To me paying the mortgage off is a lock and right now stocks are on a 9 year streak.

I say all this but I keep hesitating myself on wanting to payoff the mortgage. I try to buy stocks that yield at 2%-4% and growing. I just have my doubts that this stock run will continue for another 2-5 years.

and never invest in imaginary coins!
 
cnsaguy said:
My worry is that the money is making more than 3.5% in the market. It would seem counterproductive to do that.

Don't plan on staying at the house more than 5 years either.
Click to expand...

If your home was paid off and worth $400,000 would you take out an equity loan for $230,000 to invest?

Probably not...ever....so pay off your home now.
 
Thanks for the feedback. Gives me some other angles to think about.

Speaking of things to think about, who's mom is more orally skilled mine or 85's?
 
Knight_Light said:
If your home was paid off and worth $400,000 would you take out an equity loan for $230,000 to invest?

Probably not...ever....so pay off your home now.
Click to expand...

exactly. I mean you can get equity loans pretty cheap, so it would make no sense to do that though and risk the money.
 
KNIGHTTIME^ said:
To me paying the mortgage off is a lock and right now stocks are on a 9 year streak.
Click to expand...

CD rates are over 3% and fed is expected to increase rates two more times this year alone. You won't even have to gamble to beat 3.5%.

Not sure on position of net worth, but if $230k is solid portion of that. I wouldn't want it tied into an illiquid asset if I don't need to. If the housing market has a correction in 5 years it could take you 6+ months if not longer to unload the house. If I could have the same return and have access to the money at any time in case of emergency I choose that over a paid off house.
 
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barrister1602 said:
Own 3 high end cars. Paid for all with cash.
Click to expand...
I'd put an asterisk on that.

Depending on the finance offer, I would put half (or more) down, then finance the rest so one can get the 'financing incentives' of $X off the price of the car. Read the entire financial agreement to find out how long one has to wait to pay it off (usually only a couple of months for the processing), and verify there is 'early termination fee' (no one does these days, given the credit law a few years back), and pay it off.

When I bought my '09 Z51 Coupe, I did exactly that. They were giving serious financing incentives off, which took another $1,500 off, bringing the car ($52K list) down under $40K. They couldn't recoupe that in the 4% financing after I paid it off 2 months later (basically when the book arrived).

barrister1602 said:
Have my own SEP retirement plan that allows me to put around $50k in each year.
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Definitely the way to go. I had 3 positive years out of 5 as self-employed in the '00s, and getting out of debt and maxing out the 401k and other options, which are much higher levels as self-employed (at least than what employers usually offer to match), is highly recommended.

barrister1602 said:
Also have some investments in land (not rent houses) and mutual funds. I'm very conservative fiscally. But I'm wide-eyed liberal in the sheets.
Click to expand...
That's an American Libertarian. ;)
 
Gwoz said:
CD rates are over 3% and fed is expected to increase rates two more times this year alone. You won't even have to gamble to beat 3.5%.

Not sure on position of net worth, but if $230k is solid portion of that. I wouldn't want it tied into an illiquid asset if I don't need to. If the housing market has a correction in 5 years it could take you 6+ months if not longer to unload the house. If I could have the same return and have access to the money at any time in case of emergency I choose that over a paid off house.
Click to expand...


You have to get a 5 year CD to get close to that 3% rate and you pay tax on the gains and the people saying don't kill your liquid assets, you would be doing that with the CD.
 
Most financial advisors would probably advise you not to pay it off since your rate is so low. Putting it in the market and getting 7% or more would be better.
 
MACHater02 said:
Most financial advisors would probably advise you not to pay it off since your rate is so low. Putting it in the market and getting 7% or more would be better.
Click to expand...

What asset class is guarenteeing 7% annual return right now?
 
KNIGHTTIME^ said:
You have to get a 5 year CD to get close to that 3% rate and you pay tax on the gains and the people saying don't kill your liquid assets, you would be doing that with the CD.
Click to expand...
You can break a CD for 6 months interest in most cases.
 
fried-chicken said:
You can break a CD for 6 months interest in most cases.
Click to expand...

There are a bunch that charge 1 year worth of interest. Some charge a flat fee plus 3% of the CD amount. Opening up a CD in place of paying off the mortgage would make no sense right now.

I LOL at the getting 7% off the market like that is guaranteed.
 
When clients ask me this question I usually reverse the facts and see what their answer would be.

So assume that you had no mortgage on your house, would you be inclined at this time to take out a $230k mortgage just to have the funds invested? Most folks say no..........
 
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MACHater02 said:
Nothing is guaranteed but an index fund tracking the S&P is a good bet. A lot more work but owning rental properties can easily earn you that if done right.
Click to expand...

When I used to buy rentals (early 2000s) we put a floor of 20% cap rate on anything we bought. It isn't that good anymore but I know that people still want 10+.
 
KNIGHTTIME^ said:
There are a bunch that charge 1 year worth of interest. Some charge a flat fee plus 3% of the CD amount. Opening up a CD in place of paying off the mortgage would make no sense right now.

I LOL at the getting 7% off the market like that is guaranteed.
Click to expand...
That return over 30 years almost is guaranteed, if invested right.
 
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