Paying off a mortgage early vs putting that money in the market

[DSM Turbos]

I know we had a long refi thread going on, and this month my new mortgage was about to start. My plan was to put $275 more pre month towards my mortgage now with the lower rate, and pay it off in 20 years (I had only 25 left before I refi'd). However, talking tonight to my dad he advised me towards putting the money in the market as the mortgage every year gets "cheaper" as you get raises and with rates. I went and found an investment site to do some calculations.

On the left is if I saved the 275 bucks per month into an account. On the right is if I paid my mortgage off in 20 years, then saved the entire 1300 per month starting 20 years from now. So both compare the value of the savings account 30 years from now. At 11% return the difference is 785k vs 284k. At 7% the difference is closer to 100k.

Since there are a lot of people smarter than me on here, what do you all do? I guess it depends somewhat on your risk tolerance and goals though. But looking at this the smart thing to do is save the money and not pay more on the mortgage.

 

[karatejosh]

You are right but I bet it sure feels good to have your deed in the safe lol don’t forget the tax benefits of being in debt also


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[DSM Turbos]

You are right but I bet it sure feels good to have your deed in the safe lol don’t forget the tax benefits of being in debt also


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Yeah it’s one of the only tax breaks I get.

 

[RatLabGuy]

You're on the money, so to speak;-)

Its really hard to overcome the power of time in an acrued investment. This really shows it.

Now there are some subtle additional factors, like the fact the tbe interest on the mortgage is tax deductible (depending on if your situation makes deducting worthwhile), and tbe fact that you'll pay income tax on that investment account (unless its a 401k, IRA, etc). And there can be value in having a reasonable equity in the house.

But it likely favors the investment account, as long as you're ok with the risk.
I also dont have a clue what a reasonable, conservative average gain value is.

 

[Andy J.]

Over 20 years, the market will most certainly outpace the rate of return from paying down your mortgage.

The upside of paying down your mortgage is that bit of security that you ‘own’ your home, but then there’s the taxes...

I never understood the concept of going into debt for the tax benefits. If you aren’t maxing you tax advantaged accounts yet, this becomes a moot point.

Edited to add: As inflation reduces the value of the dollar, your mortgage actually gets cheaper. Another argument for market investment.

 

[DSM Turbos]

Over 20 years, the market will most certainly outpace the rate of return from paying down your mortgage.

The upside of paying down your mortgage is that bit of security that you ‘own’ your home, but then there’s the taxes...

I never understood the concept of going into debt for the tax benefits. If you aren’t maxing you tax advantaged accounts yet, this becomes a moot point.

Edited to add: As inflation reduces the value of the dollar, your mortgage actually gets cheaper. Another argument for market investment.

that’s basically what my dad said about the inflation and he retired very well so he did something right lol

the only thing I have to leverage tax advantaged accounts is my normal 401k which I max out now. Unless there is something else I am forgetting about. At least I come pretty close to maxing it out and mix my 401k almost 50/50 from a Roth 401k to standard

 

[BigClay]

Have yall seen the market over the past two weeks... buy buy buy buy

 

[Andy J.]

that’s basically what my dad said about the inflation and he retired very well so he did something right lol

the only thing I have to leverage tax advantaged accounts is my normal 401k which I max out now. Unless there is something else I am forgetting about. At least I come pretty close to maxing it out and mix my 401k almost 50/50 from a Roth 401k to standard

Dad sounds like a smart man!

Not sure what your insurance situation is, but HSA? I’m not sure why you’d 50/50 between a Roth 401k (who made this Roth 401k shiz up?) and a 401k. Regardless, if your maxing 401k AND a Regular ROTH account ($5500ish per year unless you don’t qualify because your bringing in the MEGA bucks) AND a HSA (to be used as a retirement account if you don’t need it for medical - no SS tax on this baby!), then your going to be contributing to a taxable account.

 

[DSM Turbos]

Dad sounds like a smart man!

Not sure what your insurance situation is, but HSA? I’m not sure why you’d 50/50 between a Roth 401k (who made this Roth 401k shiz up?) and a 401k. Regardless, if your maxing 401k AND a Regular ROTH account ($5500ish per year unless you don’t qualify because your bringing in the MEGA bucks) AND a HSA (to be used as a retirement account if you don’t need it for medical - no SS tax on this baby!), then your going to be contributing to a taxable account.

Sent ya a PM since some of it is more personal.

 

[RatLabGuy]

I’m not sure why you’d 50/50 between a Roth 401k (who made this Roth 401k shiz up?) and a 401k.

There are a lot ofd reasons to do Roth 401k/IRA.
For one, estate planning - a regular IRA can be a tax b0mb for your kids/wife/whatever.
Plus, it can be withdrawn from for certain things like education expenses (college tuition) if needed.
Then there is the gamble of whether your op tax bracket is higher now, or later.

Also note, if you have a 401k you may not get any deduction for an additional IRA depending on income limits

 

[BigClay]

Dad sounds like a smart man!

Not sure what your insurance situation is, but HSA? I’m not sure why you’d 50/50 between a Roth 401k (who made this Roth 401k shiz up?) and a 401k. Regardless, if your maxing 401k AND a Regular ROTH account ($5500ish per year unless you don’t qualify because your bringing in the MEGA bucks) AND a HSA (to be used as a retirement account if you don’t need it for medical - no SS tax on this baby!), then your going to be contributing to a taxable account.

There are a lot ofd reasons to do Roth 401k/IRA.
For one, estate planning - a regular IRA can be a tax b0mb for your kids/wife/whatever.
Plus, it can be withdrawn from for certain things like education expenses (college tuition) if needed.
Then there is the gamble of whether your op tax bracket is higher now, or later.

Also note, if you have a 401k you may not get any deduction for an additional IRA depending on income limits

So we are getting a little off track from the OP’s original post; however, both of you raise really good questions many people face. It really comes down to what you want your money to do. Single and no dependents versus married with three kids are two completely different scenarios. One size fits all does not work for financial planning. I will not bore this thread with the details of the pros and cons of a ROTH but I suggest everyone find a trustworthy CPA, CFP, and JD and let them advise you. Need some names? PM me

 

[Croatan_Kid]

One thing nobody mentioned, that I know of, is that closing your largest credit account (mortgage) will have an effect on your credit. I like paying stuff off early, but you'd probably make more investing that money.

 

[tkeaton]

What if you put an additional $500 towards the house a month and paid it off in 10? I don't know if the $/time is correct, but you get my point.

 

[thebrotherinlaw]

All I know, is the wife and I sure rest easy knowing we are debt free. We worked diligently to achieve this goal and by the grace of God we made it. Also as a bonus, I retired two weeks ago at 50 years old. Just as a side note, you have to limit your expenses. You may have to use Toyota and Chevy parts on your Jeep. I know, I know, sacrilege!

 

[DSM Turbos]

What if you put an additional $500 towards the house a month and paid it off in 10? I don't know if the $/time is correct, but you get my point.

If you could pay it off in 10 years and the invest all of it after that it would come off much better, but that assumes you can do that. I want to retire, but I also want to have fun in my general life now, we never know what we are promised tomorrow.

 

[RatLabGuy]

What if you put an additional $500 towards the house a month and paid it off in 10? I don't know if the $/time is correct, but you get my point.

Nope. Bc that requires an even bigger payment. And if you have that payment $$ available, then put it into the market, and you'll make even more $$.

 

[DSM Turbos]

Nope. Bc that requires an even bigger payment. And if you have that payment $$ available, then put it into the market, and you'll make even more $$.

Correct. Sorry my numbers above were off. 500 a month for the extra payment would pay it off in 15 years not 10 like I had. This is what it would look like.

Put 500 into the market assuming 7%, you are at 617k vs 478k in putting it into the house and then doing 1500 a month into the market at that point.

 

[Tacoma747]

I'd pay off the mortgage. Bought our current house (at basically 1/2 price for what it is valued at so we got a great deal) from my mom in 2018 (she was downsizing since my dad passed in 2017). Had to sell our old house to do it and put some extra with it, but ended up buying it w/o a mortgage. Drained my bank account pretty much, sold a truck and a trailer, but so far I can't complain. Love not having that payment every month, and my bank account has more in it now than it ever has before.

I should put more in my 401k, but I don't have an employer match anymore so I don't contribute to it like I should. I can normally make more off of what I would contribute to a 401k than the stock market does in a lesser amount of time.


So, what is the smart thing? I don't know, but I do know when I had a mortgage I paid extra on it every month. The only time I really invested in my 401k was when I had an employer that matched it.

 

[rcalexander105]

I think everybody has hit the nail on the head, but I will drop my $0.02

The finance guy in me says put your $ where you will get the most interest (i.e., if you're paying 3% on a mortgage but you can earn 8% in the market...you should put the money in the market)

That said, the sooner you don't have $XXX(X) per month going to a bill (e.g., a mortgage in this case) then that's a lot more money in your pocket each month. And your Dad is right, BUT the further in the mortgage you go the more of that "extra" will be knocking down principal.

FWIW, I've been paying about $300 extra each month on my mortgage since origination in Jun19 at 3.99%. I'm about to refi at 2.625% and plan to continue making the same payment I've been making (maybe a tad less but not much). Yea, I could go "make more money" in the market, but the sooner my house is paid for the closer I'll be to not going to work anymore.

 

[drkelly]

Everyone else has made some great points in this discussion.

I only have one thing to add. I have read several articles from 'experts' who believe the stock market will return significantly less than the historical average of 7% over the next 10 years.


It has happened before:

 

[RatLabGuy]

Everyone else has made some great points in this discussion.

I only have one thing to add. I have read several articles from 'experts' who believe the stock market will return significantly less than the historical average of 7% over the next 10 years.


It has happened before:

View attachment 329938

Valid point.
In my case, paying into the market instead of the loan early has a balance point with the market around 5%. So there is some room to fudge. But that balance point vaies by siruation depending what % of the total is goin gwhere, and how much of a rate drop you're passing up getting the longer loan, etc.

 

[Tacoma747]

I don't have much in my 401k, only about $9k. I don't put more in it because I can make more off $3-4k in 6 months than that $9k makes in two years. The money in my bank account isn't making money, but at least it is there if I run across something to buy/flip. Although I am sure I'll spend it all real quick once I start building a shop.


I don't know what Dave Ramsey would say, but I would guess he would say pay the max to the 401k that your employer matches, and put any extra towards the house.

 

[DSM Turbos]

I don't know what Dave Ramsey would say, but I would guess he would say pay the max to the 401k that your employer matches, and put any extra towards the house.

Dave also says don't use a CC, but I can show you 1700 bucks in cash back that tells me to use one. Over 20 years with my CC's, never paid a single penny in interest and I have probably near 10k in rewards it has paid off. Guess its like everything else in life, not everything works for everybody in every situation. Thats why there are so many options and why I did post here to hear some people who are much wiser than me advice

Valid point.
In my case, paying into the market instead of the loan early has a balance point with the market around 5%. So there is some room to fudge. But that balance point vaies by siruation depending what % of the total is goin gwhere, and how much of a rate drop you're passing up getting the longer loan, etc.

I'm not at 2.625% interest, so the balance point for me is probably even lower especially consider the tax break from the interest.

 

[RatLabGuy]

Everyone else has made some great points in this discussion.

I only have one thing to add. I have read several articles from 'experts' who believe the stock market will return significantly less than the historical average of 7% over the next 10 years.


It has happened before:

View attachment 329938

Valid point.
In my case, paying into the market instead of the loan early has a balance point with the market around 5%. So there is some room to fudge. But that balance point varies by situation depending what % of the total is going where, and how much of a rate drop you're passing up getting the longer loan, etc.

Another thing that occurred to me randomly today is to keep in mind the cost of/loss to inflation, which could be anywhere from 0.5 to 3%; overt he last decade its been in the 2%-ish range.
When you pay against a mortgage, thats money you've already committed at today's inflation rate, but paying down by future money which is worth less than what you borrowed it at.
With the market investment it's the opposite.

The whole point of that is the simple math means if you're borrowing money to invest, be sure to add, say, 2.5% to the cost of borrowing when you consider what your rate of return needs to be to be worth it.
In other words, if the market tanks and inflation gets bad you're better to pay against the loan instead.

 

[Lizooki]

The market can crash, but the paid off house is still yours.
The market will probably drop ( and not recover to this point) with Biden in office.