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  • Pay principal vs invest

    HI!

    We were fortunate enough to take advantage of low interest rates and moved into a new home in October 2020 (although we are taking a loan). We had fully paid off our old house and recently closed on it. My questions involve the lump sum that we received for that house.

    1) In terms of early payments toward our new principal, what do you suggest? Our interest rate is 2.65%

    A. You should pay ALL of your lump sum toward your new principle for peace of mind (that would be just over 60% of the new loan as it stands now)
    B. You should pay SOME (if so, how much?) of your lump sum toward your new principle, and invest the rest
    C. You should pay NONE of your lump sum toward you principle, and invest it all, because you can make more than 2.65%


    2) Suppose we are able to find a better interest rate and re-finance this summer. Please choose the most appropriate step in terms of paying off principal:

    A. Since you shouldn't pay off any extra principal and invest instead, the question is moot
    B. You can pay off some extra principal now, because the total principle owed won't change if you refinance (only the interest will)
    C. You should pay off no extra principal until you refinance and get a better interest rate


    3) Bonus Question: For those that have more knowledge of the stock market than I do, what ETF's do you think will do well this year?


    I thank the community in advance for your expert knowledge.

    stool_sample

  • #2
    Give us some additional details. How old are you? How much is the mortgage? When do you plan to retire?

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    • #3
      I've come around on this issue. I used to think paying off the mortgage aggressively was the best, but with interest rates sooooo low, I say pay the house off as slowly as possible and invest aggressively. Nobody here knows which ETFs will do well this year. Anybody claiming to know is a liar.

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      • #4
        How long until retirement? How are your retirement savings now? I would say split the difference. Invest a portion but pay down mortgage for peace of mind too.

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        • #5
          1.) Assuming you are already maxing out all of your available accounts, I would put zero towards the new house and put all of the proceeds in a taxable account.

          2.) I wouldn't pay extra towards the mortgage with that rate.

          3.) VTI & VXUS. Honestly, by the way you worded the question you should work on building a solid foundation of personal finance/investment knowledge.

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          • #6
            Investing the money in stocks is higher risk, higher reward. Paying off the mortgage in full is a sure thing. It reduces your monthly bills once the mortgage is gone, but while being a sure thing, it is low risk, and also low return.

            In a year when the stock market tanks, you will be happy you paid down the mortgage. In a year when the market soars, you may be kicking yourself. With a long time horizon, investing in stocks is likely the better choice. If you are close to retirement, it would be nice not to have a mortgage.

            We did some of each. Extra money each month was allocated 70% to taxable accounts, 30% to debt pay down.

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            • #7
              Originally posted by White.Beard.Doc View Post
              Investing the money in stocks is higher risk, higher reward. Paying off the mortgage in full is a sure thing. It reduces your monthly bills once the mortgage is gone, but while being a sure thing, it is low risk, and also low return.

              In a year when the stock market tanks, you will be happy you paid down the mortgage. In a year when the market soars, you may be kicking yourself. With a long time horizon, investing in stocks is likely the better choice. If you are close to retirement, it would be nice not to have a mortgage.

              We did some of each. Extra money each month was allocated 70% to taxable accounts, 30% to debt pay down.
              Love this answer!

              AGE and TIME to invest are the real questions.

              If you are 35, 100% stocks, keep mortgage.

              If 60: 70% stocks, 30% towards mortgage

              All need decent emergency fund of 3 Mo expenses.

              I would pay mortgage before buying bonds but i would do neither if young with mortgage interest rate less than 3%.

              ”which funds or ETFs will do well this year”
              Irrelevant. the right questions is: What is a good asset allocation for me at my age with the understanding that i will not touch this $ for 30 years other than to rebalance according to my IPS.

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              • #8
                It depends on your risk tolerance.

                Also depends on when you realistically want to be done with the mortgage.

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                • #9
                  I think it also depends on whether you plan to stay or not, it does not change the financial calculation. But I have to say it. Is kind of nice when you really don’t have ongoing large expenses.

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                  • #10
                    I thank everyone for their answers, this is really helpful. We are nowhere near retirement and plan on living in this house forever. We could pay it off in less than 10 years and it’d be nice to not have that payment anymore. Medium risk tolerance. Your answers make sense. Thanks again.

                    stool

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