What Should I do? Aggressively payoff Home Mortgage or Invest the Money in a Mutual Fund??
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Anonymous
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I have been trying to figure out what we should do as a family. I have been listening to Dave Ramsey's podcast. He has these Seven Baby Steps:
1. Emergency Fund of $1000 2. Pay off all debt using the Debt Snowball 3. 3 to 6 months of expenses in savings 4. Invest 15% of household income into Roth IRAs and pre-tax retirement 5. College funding for children (about 15% of income recommended) 6. Pay off your house early 7. Build wealth and give! So I am past Baby Step #5 (college funding for children). We are a household with approximately HHI of $200K. We own a rental property and a house. We have approximately $600k in retirement and $60k in a 529 plan for both kids. In addition, we have about $160k in stocks and $60k in cash. So per Dave Ramsey's steps, we should be planning to pay off our mortage as quickly as possible. However, the interest rate on the mortgage is quite low. In addition, by paying off the mortgage early, I lose the deduction for tax purposes, which would then increase my taxable income. Doing an analysis, it would cost me approximately $3,000 extra in taxes along between paid off mortgage and not a paid off mortgage. Also it would increase my AMT tax. However, instead of putting the money into paying off the house early, we could just use the money and put it in a mutual fund (ie Vanguard 500 index fund) and get a return of more than what the bank is charging for our interest. What would you recommend? If it matters we live in Virginia. I am hoping that the kids will attend the numerous state schools in VA. They are both 11 year old. So there is time but not that much time for both the kids. Would love to hear your feedbacks. I know that our 529 amount is not that high. But I have since increase our contribution for each kid to about $700 per month. So now we have approximately $2500 extra to use to either decrease the mortgage or increase our financial investment. The other option is that if I should pay down the mortgage faster, I can also sell some of the mutual funds to decrease my loan amount. If it matters, the loan amount is $350k. thank you |
Anonymous
| What is the interest rate on your mortgage? |
Anonymous
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TL;DR
Rule of thumb. If your rate of return in a Mutual Fund is higher than your mortgage rate, then, invest in Mutual Fund. |
Anonymous
| Mortgage rate is 3%. Taking into consideration the itemized deduction of the interest, it is lower than. So if the market made any more than the 3% I am ahead of the game. But for some reason I feel like Dave would say to pay it off still even though it doesn't seem to make financial sense. In fact it would hurt me even more if it is paid off because then my AMT is even higher in terms of dollar amount. |
Anonymous
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The main reason it is better to pay off the mortgage is because you can lose all the money you invest in the stock markets. People often forget that. If you can find a bank account that gives you more than 3% on an after tax basis then go for it (and tell me about it) but if not repay your mortgage.
You can then invest the mortgage savings into the stock market and not worry if you dont make your target return. |
Anonymous
The sneaking feeling you're getting that Dave Ramsey is wrong on this one is correct. If you have an excellent interest rate, do not pay down your mortgage. Ramsey is far too conservative about debt, as are a lot of DCUM posters. (I also don't agree with the rule of thumb identified above; even if the interest rate is somewhat higher than your expected rate of return in the market, there are multiple reasons it could still make sense not to pay down the mortgage. Some obvious ones being: (1) there are large tax advantages to having a home loan; (2) if inflation goes up, the significance of your debt goes down, whereas some investment options are relatively inflation-proof; (3) if you need to access the money quickly, its usually easier to get it out of the market than out of a home; and (4) DC real estate is so expensive that you could easily end up with far too much of your net worth in real estate). |
Anonymous
| Why can't you do both - prepay your mortgage and invest too? |
Anonymous
| I plan on paying my house off as quickly as possible. I hate debt and want to know that I have a roof over my head if I ever lose my job or become disabled. I know I could make more in the stock market and I know that the market always makes money in the long run. However, the stock market makes me nervous. |
Anonymous
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I don't agree with a lot of what Ramsey says, or Suze "Girlfriend" Ormen. Both are way too conservative for me, and I am a very careful spender.
Our rate is 3.25%. We want to be mortgage free when we retire BUT we don't want to be cash poor and we want the write-off... And we also realize that our rate is so low that putting too much cash towards paying off our mortgage would be foolish. We would rather up our 401K contributions or increase or emergency fund - to 1 yr instead of 3-6 months. I say one year because DH lost his job a few years ago and it took him ONE FULL YEAR to find another job. we were unprepared to say the least. Anyhow, we calculated that if we overpay our mortgage but just $100 every month, our home would be paid off 6 years early. that's a pretty good trade off! |
Anonymous
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Op here. After careful thinking I think we shouldn't pay off mortgage early. We are already heavily invested in real estate as is. Dh and I are 40 so even with the 15 year mortgage we expect to have the house paid off way before retirement. I will put the extra money in mutual funds so that it will grow more. I did more calculations online and it shoes it makes much more sense to invest the money.
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Anonymous
Exactly. |
Anonymous
Obviously. Except your mortgage interest rate is fixed and rate of return on a mutual fund is random. You have a low mortgage rate and *historically* something like a index fund will have a higher return in the long run than your mortgage rate. But if investing in stocks was certain or highly likely to give a higher rate of return, you bank wouldn't have loaned you the money- they would have invested in stocks. You sound like you are in good shape so either decision will be fine. |
Anonymous
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How large is your mortgage?
I'd hesitate to pay off a 3% mortgage early, at least aggressively. While the market's doing well I'd focus on diversified, well managed, low expense funds like some of the better actively managed Vanguard funds (index funds are fine but can get hit harder in down markets), and allocate between mortgage pre-pay and investing dep. on the market. When the markets were down and interest rates were low I aggressively prepaid the mortgage for that guaranteed return. For the past 3-4 yrs. I've backed off on the mortgage prepay and put more in the mutual funds, always remembering that this should be long term money only, not anything you think you'll need in, say, the next 5 yrs. I've stopped prepaying the mortgage and am taking a more defensive position with stocks now to cover the bottom side since a correction is likely at some point in the next year or 2 or 3. |
Anonymous
| Mortgage is approximately $350K. |
Anonymous
House is worth approximately $650k |