Extra house payments vs. investing

[Arkad]

Just finished calculating year end financials and am curious regarding the thoughts people have between paying down your mortgage and investing the money instead in something like a total market index fund.

I am 51 and now FI. I hated the idea of debt and paid off my student loans in under 2 years, bought a smaller house than I could afford and paid down the mortgage early and have been debt free for a number of years. Out of curiosity, I looked what those extra payments could have yielded had I put them into the market. I probably could have had about 50% more than the 800k of equity I now have in my home. What's done is done and while I enjoy having no debt, it is kind of hard to think about the missed opportunity cost even though obviously there was no guarantee it would have paid off to invest back then. I also was 100% in stocks during that time, treating my home equity payments as a "bond type" fund as far as risk was concerned

I am wondering what others have done and how they view this situation many of us face?

[jhwkr542]

While not having reached that point, I've seen many topics like this over at bogleheads. There always seems to be a split that appears to be 50/50. Personally, I like the pay off debt idea like you chose, but I certainly understand the arguments on the other side. I wouldn't lose sleep over it. It certainly wasn't a bad or wrong decision.

[pulmdoc]

My wife and I took the same view, that extra mortgage payments are basically a bond that can't default (you could go into foreclosure and lose the extra payments, but that is better under your control than lending to someone else) paying our mortgage interest rate. So that was factored into our overall IPS and the remainder of our asset allocation has been heavier in equities than it will be when the mortgage is paid off.

I feel like the invest vs mortgage paydown debate cycles through every few weeks on this site and similar ones (eg Bogleheads). Investing in equities is a higher risk/higher reward path to take. The reasons my wife and I went the mortgage paydown route (partially, we are still putting money in the market, just not every penny of it) were for psychic benefits (the knowledge of being debt free sooner rather than later) and for flexibility. If the house is paid off, then we will never be forced to keep a house we don't want because the real estate market has tanked and we don't have the cash flow to rescue it from being underwater. It sounds like there are psychic benefits on your end as well given your professed aversion to debt; they are just difficult to place a monetary value on.

[DarrVao777]

Arkad wrote:

Just finished calculating year end financials and am curious regarding the thoughts people have between paying down your mortgage and investing the money instead in something like a total market index fund.

I am 51 and now FI. I hated the idea of debt and paid off my student loans in under 2 years, bought a smaller house than I could afford and paid down the mortgage early and have been debt free for a number of years. Out of curiosity, I looked what those extra payments could have yielded had I put them into the market. I probably could have had about 50% more than the 800k of equity I now have in my home. What’s done is done and while I enjoy having no debt, it is kind of hard to think about the missed opportunity cost even though obviously there was no guarantee it would have paid off to invest back then. I also was 100% in stocks during that time, treating my home equity payments as a “bond type” fund as far as risk was concerned

I am wondering what others have done and how they view this situation many of us face?

Click to expand...

I do both.

Tax advantaged accounts come first, we try to max out the 401k, HSA, Roth IRA, 529, etc as early as possible in the year.

Once that is done, we attempt to send 30% of each gross paycheck into a taxable account that is set aside for retirement maintaining the same asset allocation as the tax advantaged retirement accounts.

If there is any left over:

- I double up the monthly payments and if/when I hit bonus thresholds, I try to send a large lump sum towards the principle of the mortgage.

- I try to balance this by sending funds (roughly the same amount) into an aggressive taxable account (100% total market index for now)

[VagabondMD]

I paid off my mortgage in 2010 and am glad that I did. Not regrets. I would have made more in equities in the period, but I could as easily lost money on the decision to buy stocks (cloudy crystal ball and all that).

Psychologically, I feel more financially free having no debt. Now, if I could only launch those money-grubbing teens...

[TheGipper]

I second the split the baby approach.

After maxing out all tax-advantaged accounts, we just split the monthly excess between our taxable account and extra mortgage principal, often in a random fashion or by whim. Without having a crystal ball to predict how the market will do over the next several years, there is no way to know which is correct.

I agree with the goal of still aiming to have house fully paid off by retirement for simplicity's sake.

There are some instances when mortgage debt is slightly beneficial (i.e. on rental property to help offset rental income if depreciation and other expenses aren't enough to offset).

Really can't go wrong with either choice.

[Zaphod]

Search the forum, should be lots of back and forth. Both good decisions, can split, and it really depends on your personality and circumstances.

[Antares]

I've taken the position of not paying down the mortgage. Apart from the obvious motives, i.e. seeking investment returns instead, I'm underwhelmed by the advantages I'd gain from getting rid of it. I get the tax deduction from the mortgage interest, which helps. If I had no mortgage, my property taxes would remain and that cost is twice the cost of my mortgage. I don't think I'd much notice the lack of a mortgage financially, and I don't psychologically feel burdened by it. Additionally, I'm going to sell my house when I stop working anyway, and the equity will more than pay for the next place in a lower COL area which will also get rid of onerous property taxes, so there's no concern about needing it paid off by retirement. I feel less burdened by having the cash available to invest. Different strokes, I guess.

[hightower]

Also keep in mind that hindsight is 20/20. The last 8 years the stock market has been doing nothing but going up.  So, its easy to look back and think "************************ it I should have invested."  But if the stocks had tanked over the last 8 years you'd be glad you didn't invest that extra cash.  Plus, in the next few years we may see our next bear market and you'll probably be very glad to see that the equity in your house is still there.

By any measure, you've done very well for yourself and should be proud!

[Zaphod]

hightower wrote:

Also keep in mind that hindsight is 20/20. The last 8 years the stock market has been doing nothing but going up.  So, its easy to look back and think “damn it I should have invested.”  But if the stocks had tanked over the last 8 years you’d be glad you didn’t invest that extra cash.  Plus, in the next few years we may see our next bear market and you’ll probably be very glad to see that the equity in your house is still there.

By any measure, you’ve done very well for yourself and should be proud!

Click to expand...

Hes been around longer than just the last 8 years and speaks to power of long term compounding and inflation. There is no reason the house cant tank as well, and they might, and I bet it did in the last one as well. In bear markets more and more all assets trend toward a correlation of 1, you even see this on normal pullbacks. This is part of the ever far reaching effects of financialization.

You'd also have to be pretty far under and not making payments to be seriously at risk of losing your house.

Over the time of the OPs likely attending career the market has been pretty bad, way below long term average rates, and inflation has been very low and even then investing would have come out far ahead. Dont forget two of the worst bear markets/crashes in history are within this time period. If there was a crash even if he only paid on time he would probably be well over 50% equity and it would not matter at all. From Jan 2000 to today the SPY is only up 114.6% on a total return basis, not exactly a bananas period for equities at all, and likely is very close to OPs horizon.

There is no hindsight necessary for this calculation, it is simply the most important concept in all of capitalism, the time value of money. Paying off a mortgage over investing is a poor choice in this regard, no if ands or buts about it, its just the way the math works. Obviously the reason people do it isnt to make the choice with their money that gets the best return, etc...but from math standpoint theres no real question.

I will definitely not be paying off my mortgage early until I am FI or much older and then its possible my priorities change. Especially given todays rates, makes the trade off even worse when you can buy SP or muni fund and the dividend is higher than your mortgage rate. I think a lot of people that made this binary choice in todays environment will be doing this calculation later on in life. Obviously if you do both you wont be so concerned about it.

You most definitely can put a price on the cost of this, its the amount you otherwise would have had above what you do, in this case it sounds like +/-400k. Thats the point of the time value of money, opportunity cost, etc...is you can put a price to these things, within a reasonable range given historical knowns.

[Aj]

You seem to have had an approach that suits your comfort level and philosophy.

We just made regular home payments and maxed out tax advantaged accounts first.   Bonuses were used to help acquire rental properties to help with diversification.   We don't have much in a liquid investment portfolio but that is something we are developing now.

[Craigy]

Depends on your interest rate.

I'm at 3.125%.  With tax benefit, that's probably something in the low 2s.  I'm in no particular hurry.

Now that student loan is another story.