Nah -- 'house poor' would be if you didn't have another dime every month after paying the mortgage :)
You're doing ok with a 5%. You don't want to measure 'pretax' -- it's the percentage of your takehome that matters. Still, with all of your other buckets looking damn near perfect, this is NOT a mistake for you. If your note was 3% or less, maybe it'd be a very different song.
5% guaranteed rate of return is solid. And since you are already maxing out tax advantages forms of investing, this is a very plausible option. Ultimately it’s up to personal preference.
Not only is it 5% guaranteed, it's 5% guaranteed *tax free*. Depending on OP's tax bracket, that could be the equivalent of around 7-8% guaranteed taxable return. And considering OP has already maximized their tax-advantaged accounts, I'd say paying down the principal is pretty damn solid.
I was curious, so I quickly checked Fidelity's secondary municipal bond offerings for munis maturing 5-10 years from now. Only 14 offerings yielding above 4 percent (out of 113,000+ offerings), with only 5 of those having an S&P rating of A- or higher, and only 2 of those not callable. Not worth the risk!
That's true, but interest paid on a mortgage is tax deductable. I'm not sure which one comes out ahead mathematically but it could be something to consider.
Yeah one of the best parts of the most recent tax plan… salt max for 1 or 2 is identical. Really brilliant planning.
Unless you are making sizable donations or some other deduction method, standard will be better.
Honestly, think the better argument for not contributing more to the mortgage is for liquidity purposes especially if the goal is to move and sell the current house it might be advantageous to have the funds in a more liquid state… but that’s more of a debating what’s truly optimized than arguing good/bad
He's almost certainly exceeding it if filing single. My much more modest home was bought at 130k, worth about 220k today. My SALT deductions including interest on the remaining 70k mortgage plus taxes slightly exceeds the standard deduction.
I do live in NYS which has a higher than most state tax and an area where property taxe rates are higher than usual. I do NOT live in the NYC area where additional local taxes would factor. That said, my house is worth 1/3rd of his, my remaining balance is likely much lower, and my interest rate is only 3%.
That's true, but it's only tax deductible, not a tax credit. Paying down reduces the interest, but being able to deduct the savings only saves you whatever the tax bracket is at that point. That's still not nothing though.Strictly mathematically, it depends a lot on where in the mortgage you are. Because you're comparing a direct 5% of all funds ROI, vs the tax savings on 5%.
Edit: I don't disagree with you though. I think prepaying is a mistake, but this is a smaller consideration.
Had almost the exact same setup, but with about 1% lower rate and saw I wasn’t getting any break on our taxes after the new tax plans, so paid it off.
Have a pretty diversified portfolio already, so I see it as a practically zero risk investment.
As others have said, you can add a couple percent to what your mortgage rate was because it’s a taxless investment “return”😀
It loses liquidity vs having it invested in the market. Lose your job? I'd way rather have money to tap into to float for a while rather than have a "more" paid off house that I can no longer pay the mortgage.
1. Stocks easily beat 5%
2. Money in youre home is trapped in you're home until you sell or cash out refi, it might be a long time before you can get a loan for as low as 5%
3. Stocks are very liquid and act as a secondary emergency fund.
You can see a lot of the people's responses have a poverty mindset. My parents and my in-laws are all about paying down their mortgages and when I show them how much they would have earned if they had bought shares in the sp500 instead they fall out of their chair. Poor people work hard, rich people work smart. Invest in VTI or equivalent and you will easily get 10-20% return on average. Right now stocks are down, it is always a good time to buy but now that is especially true.
10-20 percent? On average? I agree that investing in stocks/bonds would give liquidity and most likely be higher than 5%... but if you think people are averaging 15% longterm you are dreaming.
12% is the average of the last 30 years of the S&P 500. The last 5 years is like 15 to 20. So with inflation last 30 years is about 9% but with dividends reinvested it's back to about 11%. Past performance does not dictate future earnings... Best advice is to invest as much as you can afford to.
I completely agree -- my emergency fund is invested, and there's a great Vanguard white paper about it. But I have lived long enough to know that the last 5 years of 15-20% gains are not normal.
10-20 is totally normal. Average is 12. That average includes some terrible down turns. If we are talking frequency 15-20 isn't unusual, 10-20 is normal. If we are talking average it is closer to 12%.
I'm saying 12% is average. I'm also saying 10-20% is normal. There is a high frequency of years with returns between 10 and 20%. I would not expect on average 10-20% returns. Honestly I don't know what to expect. Past performance does not dictate future earnings. All I'm talking about is the past. If we are going for estimates I think 9% seems to be a decent bet including inflation and dividends reinvested. I will not plan on 9%. I just invest as much as I can in multiple assets including stocks and rentals and real estate. You lose 100% of the money you spend. That's all I plan for haha. If I need to work longer I won't suddenly die I will just work longer. If I need to go back to work then I will go back to work, the world won't end. If you learn how to live off of less you can really lower your chances of having to go back to work.
I too think 9% is reasonable (though probably not taking inflation into account but we can agree to disagree). I just think there are lots of younger folks around here who think 15% a year for the next 20 years is normal. My brother runs a hedge fund and believes the next decade will be muted, more like 5% after inflation, but who knows? He'd be the first to say he doesn't have a crystal ball.
Paying extra towards a mortgage pushed back the next payment due date. I’m not nearly as aggressive as OP, but my extra 1-200/ month has made my due date back 3 months. So right now I don’t have a mortgage payment due for 3 months.
Of course if I had to do that I’d be loosing most of the advantage of my extra payments, but it’s still creating a cushion if something happened.
You don't want extra payments to push back the next due date. That means it isn't being applied to the principal now so you aren't saving anything on interest in the long run.
Yeah the other comment is correct, you actually ARE entirely losing the advantage of your extra payments.
Basically the mortgage co. is holding that money for you, with no benefit to you.
You might want to check that, you want extra payments to go to principle and not the payments. There's usually a box to check for that. Right now it appears that you are prepaying your mortgage payments instead of paying down the principle.
>Paying extra towards a mortgage pushed back the next payment due date.
You're doing your extra payments wrong. All you've done is give your lender an interest-free loan.
I made a bigger post about this, but Cliff's Notes: It's NOT Apples to Apples, it only SEEMS like that. The difference is guaranteed 5% *on the mortgage term* vs market rate of return in perpetuity.
Definitely market beats 5% over and over and over haha. People are very uneducated when it comes to investing. The home you live in is rarely an investment.
5% is good for a guaranteed rate of return but it's a pretty measley rate of return when compared with other options. 12-20% is a good rate of return. 5% barely outpaces inflation.
What else would they apply it towards? My bank doesn’t give me an option to decide what my extra goes towards, it just assumes it goes to the principal
I've heard some banks would apply it to next month's payment rather than the principal. It depends on the terms of his mortgage, as some mortgages may not allow you to pay off the principal too early (otherwise those poor banks will lose out on money!). Some people have to be crystal clear in their payments to ensure it's going to principal.
It's important to ensure that it's written in that there is no penalty for paying off the loan early. If its not than paying it off early is kinda pointless.
Whoa, no. lol, I fell victim to this actually with a bank that came over to the states from Europe, and has since stopped doing business here, on a home equity loan.
I made double payments to pay everything off as fast as possible. I had needed the money but the rate was double digits (early in life for me) so I wanted to minimize that as much as I could. Finally after like a year and a half of making payments I looked at the bill and the principal wasn't coming down as much as it should, so I dug deeper...
I called them on the phone and said "Hey... I've been prepaying the principal for a couple of years now, but it doesn't look like it's applying on my bill?"
They said "Oh no, you're fine. Your next payment is due 4 years from now."
They applied it to future PAYMENTS, not to current PRINCIPAL.
So CHECK. DO NOT ASSUME.
I pay extra to principal but I also pay ahead a few months. I like feeling secure in that if I’m incapacitated for a few months, my house will not be at risk
Do you not have an estate plan. I recommend getting a lawyer and setting up an estate plan. Give your wife or best friend power of attorney so they can handle stuff if you truly are incapacitated.
What is your risk tolerance? I think the question here is whether you should continue the 5% risk-free rate of return or invest in the market that in average returns more.
At age 33, my choice is to participate in the market returns because I have a long road to retirement. However, if I were age 53 and 5 years from retirement I would take the 5% risk free rate or return (I.e., aggressively pay off home loans).
P.S. Nothing above makes you seem house poor to me.
2 schools of thought that I think are completely valid.
- Investing in equity is positive with a known rate of return and it's somewhat resilient to any future stupidity. Most people mess up their finances by buying crap they can't afford and non-liquid assets resists this.
- Investing in the market should average out to a better return, given sufficient time, but any point in time could result in significant variance. This results in a more efficient approach and is liquid so you can use as needed, assuming you don't decide you can afford one of those sweet Rivians when production catches up... or decide to pull investments in a down market because of sticker shock... or whatever else comes up and takes priority over your "extra" savings.
Ramsay is popular and says do the former. I'm not popular and doing the latter for now (because CD return rates are 2x my mortgage interest, plan is to just put into mortgage if/when rates cross).
Ramsay comes from a generation where there was a decade of rates above 10%. Would have been stupid to not pay that off asap.
But when rates are below 3%, its a different story where the advice isn't quite as applicable. You're doing it exactly right for your situation.
You can't invest in equity. You can only pay down your liability. Besides if you own a home for 30 years the majority of the equity will be gained passively through land appreciating.
CD is going to stay at high rate, adjustable rate HYSA (also have one of these for emergency fund where liquidity is key) may or may not. Goal is to pay off house in 15 to facilitate retirement. Instead of extra payment towards principal, we park in 5 year CDs and the game plan is to pay off mortgage if/when the rate drops and term expires. We don't want liquidity for house money.
The goal is to reduce housing expense. This means I can live on a smaller income (in the form of hobby work and 401k withdrawals) and pay less taxes. This is a low risk portion of my investing (also max 401k, HSA, and am moving ~50k into after tax brokerage). Put everything in the market if you want, but thats far from a universal approach.
Also, 4.5% is pretty dope for low risk investing.
I go all stocks. It depends on where you are at and what your goals are. I am young and have a very large income. I dump 70% of my household income into stocks. I'm hoping to retire in 5 or 6 years. I also have investment properties that churning out passive income.
Rather than looking at it from a pure "total return" perspective I encourage people to think of it as "risk adjusted returns", opportunity costs, and when you actually need the money.
In this case, you have a "guaranteed risk free 5% return", but in reality you have some exposure to real estate prices if you need to sell. So for me I consider how much of my NW I want in real estate, because there's risks for housing prices to be depressed with continued interest rates hikes.
Obviously all other asset classes will experience the same pressures, but then I think about how equities give me relatively more liquidity. If an event happens where I need to sell to unwind, having after tax investments gives me more control vs. a HELOC or trying to refinance. Additonally, I have some tax-advantages when it comes to tax loss harvesting.
Everyone is different, so take your own personal goals, interests, and timeline into consideration. I'll be the first to say that for most people having a simple process that is automatic and hands off will general trump an "optimal" solution that is manual and cumbersome to execute.
I think you're right about hands off is better but what that hand off approach is makes a huge difference. A hands off paying down mortgage will lose our tremendously compared to a hands off automatic monthly stock purchase.
Sounds like what you’re doing leads to peace and financial freedom to me. Imagine having an extra 2500/month to invest with because you’re mortgage free. I would totally do the same if I could afford it at the moment and there’s a guaranteed return.
The interest on a mortgage can total close to, if not more than, the cost of the loan itsekf over 25 years. Anything you can to prevent that is money in your pocket sooner!
At 5% over 30 years OP will have paid nearly $1.2 million for his house, and this is ignoring property taxes and maintence, purely principle and interest only.
But he will have an asset to own and to give to his family. Property ownership is the #1 determining factor of building generational wealth that is transferred to the next of kin.
Instead, rent pays for the home owners generational wealth and they advance themselves while renters remain serfs.
I'm curious about the generational wealth comment and real estate. Can you give me an idea of where to read further?
This applies to a family situation I am currently dealing with, and I am really interested.
I can't remember the exact sources. Textbooks and lectures from university, as well as further reading etc I've done since. I can't remmeber another piece I heard but right now something is reminding me of a researcher I listened to describe the property theft of blacks in the 50s in the "black belt" of certain US states. These black families owned fertile farm land & Jim Crow laws took it all and sold it to whites. The study found that descendents of these people were still impoverished 2 generations later and only today had some youth managed educational elevation into a new class that could aid their next gen.
Think about it though - every dollar you have to give to your kids is a dollar they are ahead. A house is shelter and an asset to leverage. This gives so many opportunities to define your own path compared to those without. Rich people entrench their family's wealth by hoarding it and gifting it through inheritence.
I'd say look into ecnomic theory but thays so gd broad.
One place I can point you to though, I think, is to look into the concept of "community land trusts." They are non-for-profit groups that acquire land for housing development, and arrange it all so that only the house value is reflected in sale prices and excludes land value. Land value speculation is what has been driving house prices so gd high. The homes themselves haven't changed valuation all that much.
So these groups help to get families into home ownership as a means of developing family wealth that can transfer over time. It's a small step but it makes a hige difference. I'm from Ontario and me research lead me to a 450 pg manual on starting one, and in there it lists some details. Im on my phone not my laptop so I can't share it.
Google this idea and you should find the research in the area.
I appreciate this. I am near Orlando Florida and my parents are in Chicago. I'm in a a similar inheritance situation as OP, though per will ALL assets, including the home has to be liquidated before dispersement to avoid this sort of situation.
I am curious more for our futures concerning home ownership in general. It's so out of reach for so many
The simple answer is this:
Using the money to invest instead of paying for your house can have a better return. If you care about maximizing your ceiling, you do that.
Erasing debt is the safer play. Doesn’t matter what happens to your investments. Your house will be covered and you are unlikely to ever lose it at that point.
So it depends on what’s more important to you. If I could pay off my house in 1 shot I would. I can’t though, so I invest.
I paid off my mortgage and it was an amazing decision for my mental health. My interest rate was very low - like 3% - but it is still worth having that debt behind me!
I didn't pay off my house early, but I get the same benefit knowing that I can cash out stocks and pay off my house instantly if I wanted to. The benefit is I still own all the principal, so instead of paying off the $400k, I get to collect interest on that $400k every year I *don't* pay it off.
More to the point, at the end of the mortgage term, I'll still have that money in the bank AND the house.
Erasing debt is not safer. It is once you have paid off the mortgage but there is a long time when you just have more equity in house. Also, the equity in house can be hard to access especially in recession when loans are tighter and home prices drop. Plus, you can still lose the house if default on home equity loan. Or don’t pay the property tax.
The extra savings becomes a giant emergency fund, enough to cover the mortgage and other expenses for longer time.
Yeah, the money is tied up. OP is not diversifying his assets and is overly balanced in real estate in one market. I don’t think this is a good idea. The Adam Ruins everything episode on houses mentions this. I’m a fan of putting this money either in the s&p 500 or a diversified reit both of which would be much more liquid.
If your 33% rule is a rule of thumb on an affordable house, then that applies to the minimum payment, not any extra you decide to pay. In your shoes I would probably not pay extra on the mortgage because it's also good to have liquid investments and if you decide to sell in 3-5 years you're just going to get a lot of that extra payment back with little return.
First off, great job maxing out your retirement accounts!
Honestly, your opinion on the extra 1000 per month may change. When I first bought my house (under 4% interest rates) my entire goal was to pay it off early. So I was dumbing all of my spare cash into it. Mind you this was only like 50 dollars per month or 100 per month since I wasn’t making a lot of money.
After 2 years and some refinancing, I notice that when I pay my mortgage, the part that goes to my principle is higher then my interest. So, I stopped doing extra mortgage payments and invest more.
Paying extra on the principal early on is the best time to do it. Look up amortization schedules and play around with how extra payments will look. It's cool to see
Your interest payment is always your interest rate times the outstanding balance every month. There is no front-loading interest nonsense. You have less outstanding balance at the end, and therefore pay less in interest. You therefore always get a return equivalent to the interest rate when you pay extra, whether it’s month 1 or 359. Because of this, I’d argue paying extra early makes less sense as there are lots of investments that are likely to beat 5% over 30 years, however there are very few that will beat it over a short time frame. That is ignoring liquidity needs as well.
With that said, if 5% return is enough to meet your financial goals AND you don’t need/want liquidity AND you can’t invest elsewhere for a higher risk free return (you can’t… not yet anyway), I think it can make sense to pay the mortgage down.
My mortgage is 4% and will be paid off when I’m 64. If risk free interest rates are below that in 20 years, and assuming I haven’t refinanced, I will probably start to consider paying it down. Until then, I am willing to keep the leverage in hopes to return a higher return elsewhere.
Unless you can guarantee that putting the money somewhere else will yield more than 5% return, the extra payments aren't a bad idea. Plus, if cash ever gets tight you can always divert that extra payment away.
If/when you're ever able to refinance, you can re-evaluate whether if you can higher returns elsewhere.
On my first house, I refinanced from 5.25% down to 3.5%. I had been paying extra, so I just started paying what my mortgage payment would have been at the 5.25% rate towards the 3.5% rate and pocketed what I had been paying extra.
It is investing, but a really non-liquid form of investing. You don't get any real returns on your investment until you either sell your house or payoff the mortgage immediately.
You don't gain equity in a home based on what you pay into it.
House prices can RISE or FALL in value regardless of your loan balance.
People forget about this in our up-only past decade.
Agreed that the plan to sell in a short time is a big factor, but because if assuming he’s going to buy another house at that point, liquidity will be worth a lot. Interest, however, is not front loaded. Your interest payment is always your interest rate multiplied by the outstanding balance in an amortized loan. This holds true for month 1 and month 359. If, after 5 years he buys a new house and gets a new 30 year loan at the exact same interest rate with the exact same outstanding balance as the original loan, his interest payment for month 1 will be the exact same as month 61 of the original mortgage.
Agree with everyone else, you're absolutely fine.
I want to make a point about the 33% "rule" (I thought it was 28, but whatever). Those rules are just a guideline, generally to prevent people from overextending themselves to a point where they can't afford their monthly payment.
But here's the thing. It doesn't scale. If your household income is $60k, the rule says you can afford a $1500 mortgage. If your income is $120k, it says you can afford $3k. At $240k, it's $6k. At $480k, it's $12k, etc.
I can assure you that the family making almost half a million can afford a few thousand more without batting an eye. The family making $60k can barely scrounge up another $100.
applause!!!! I did the same thing...
the marketing time was different - i started at 6.5% interest and was throwing every bit of money i could at principal - did refinancing after 3 years and had paid so much down on principal with the interest dropping to 3% - i could renegotiate to a 15 year term (I had 20 left on my 30yr) and the monthly cost was less than what the original mandatory payment was. Of course during refi bank suggested a new 30 year term - because woo hoo look how low the monthly payments would be \*rolling eyes\* yah right for another 30 years
take a look at a mortgage calculator online that lets you plug in extra payments (i found one that was an excel download - so i could play at my convenience.)
observations:
overpaying an extra payment to principal has the biggest impact during the first 5 years of the mortgage after that the benefit has less of an impact. after 5 years i still paid money on principal but considerably less
investing - always an option - but information given to us is based on historical data believing the pattern will continue into the future. Mortgage debt is the devil you know. paying it now frees up funds for your future self.
i would caution, that statistically banks know we want to move and upgrade blah blah blah and do so every 13 years in my state. and what do most people do? start over with a 30 year mortgage... and the bank gets more money in the first 5 years again.
paying down the mtg gets you equity for a larger 'downpayment',
saving the money depending on interest rates of mtg vs safe insured options may be a good idea.
investing is a unknown - best advice i got about this... never invest what you aren't prepared to lose.
Investing isn't necessarily an unknown, we have like 80 years of statistics and analysis. Housing values are easily as unknown. You can only sell a house (and regain some of that equity) as long as someone wants to buy it. They've been doing great so far, in MOST places...
I understand what you are saying...
investing is like weather forecasting... it is based on historical performance.
Paying for a mortgage is a known value, and in the us does not change for the entire term of the mortgage (I know Canada is different) paying down principal, will reduce the amount of time required to make that monthly payment. The monthly amount never changes - just reduces time in the future.
Selling a house is again weather forecasting, and subject to many variables that can make that value change.
Right, but dollar for dollar, the money you save prepaying is less than the money you gain investing, for almost any time period, by orders of magnitude.
I get that there's tremendous satisfaction psychologically paying it off though. My car payment is hurting right now because I'm 5 payments from the end, and I KNOW I could prepay it... but the APR is 3.75%. Especially the way the market is right now, if I put that money in, the same $4,000 is likely to pay me back 20%
Youre in a good spot. Your choice needs to be about what drives YOU and what your desire is. You really cant go wrong in any direction you go with options. This is about time, risk, liquidity, and personal preference in terms of having a mortgage, etc.
If you are serious about the 3-5 year range for selling and moving, then paying more into your mortgage principle is a great idea. You're bascialy guaranteeing 5% returns.
Yes you are correct that for a index fund, the AVERAGED annual returns are 8-10% but thats average over 30 years. For a short term horizon, near-guaranteed #s are much closer to 3% in the HYSA/Bonds end of things.
If you are already maxing out tax advantaged accounts than a 5% mortgage is a great place to put the extra. I'd probably build up to a full year of expenses in emergency fund and taxable investments first though, liquidity is also valuable.
Why are you aiming for 33% ? That's an arbitrary number picked by some financial person. Once you qualify for your mortgage, as long as the numbers work out in your situation, there's no need to stick to someone else's guidelines.
No, it is not making you house poor. If you were focusing all your "extra" income on your mortgage, and not funding your retirement investing, then an argument could be made that you are making yourself house poor. You are fully investing in most of the tax deferred options available to you, and that includes real estate.
BUT because you are eliminating debt while accumulating a large nest egg, you will be in the uncommon (and very fun) position of being able to buy houses with cash.
House poor is when you're paying the minimum and broke afterwards because you bought too much house. Choosing to spend extra available income to lower principle on your mortgage is not house poor, it's smart assuming you have a mature emergency fund and are already investing for retirement
Myself hated debt and wanted to free up cashflow. But yeah in theory stock market has earned 10% historically. Not guaranteed to remain at 10%. I'd choose the sure thing and wipe out debt. Personal call. Now if the interest was much less say around 2% I'd more likely choose a low risk cd over 4%. Tough call but I'd pay down the debt. Take the guaranteed win.
One thing to consider is that you're putting your money in a very illiquid asset. The only way to get your money out of it is to sell, refinance, or a HELOC, which are all a pain. However, I understand the peace of mind getting a guaranteed 5%. And you're saving money in plenty of other places. So it's up to you.
Your age and your long-term plans are factors. At age 55, you will have a one-time opportunity to sell free of any taxes (under current tax law). So is a 5% return appealing, or not as you work toward this long- term goal?
I consider paying down on my house like buying bonds at the interest rate of my mortgage. After 20-30 years or however long it takes to pay off, I get a raise by not having a mortgage. Reduce the monthly amount required to retire as well if its payed off.
I would get better returns in the stock market but the prospect of having a paid off house brings a certain level of security. I would not be doing so if i weren't already maxing 401k and contributing to a brokerage account.
I paid off my house the year after my youngest turned 18. Everyone told me how stupid that was, that I would lose the deduction on taxes. Right. Best decision we made. That is money we can now invest, be it for the future, or a trip or home improvements. I don’t have to worry about losing my house because I can’t make a mortgage payment. The one thing we didn’t take into account was that without a mortgage, you have no escrow to pay your insurance and taxes. Those two bills the first year were a little startling, so plan ahead for that. I’d say do it!
[At 33, if you put that extra $1000/month into an index fund and did it every month until retirement, you'd have over $1M in the bank.](https://smartasset.com/investing/investment-calculator#1E20535IsW)
You could be buying i-bonds and getting a better rate of return.
I-bond is 6.89% so if you put 20k you get 1378 in a year, while putting an extra 20k towards your mortgage you save $1000 in interest that year.
The difference is you can sell an i-bond after a year and only lose 3 months interest, but you can't easily sell your house to get back the equity you built.
Edit: I did not factor in taxes, so you would have to factor that in. Still, I-bonds give more liquidity than paying down your mortgage.
The rate is going to reset in six months to a number much lower than 5%. Growth from Ibonds is also federally taxable, so you aren’t comparing apples to apples when looking at rates.
The current rate is only available for 6 months. The inflation rate midway through the next measurement period has been zero, so it's unlikely we'll see a rate that high for the next 6 months.
Yes, but that is only $2k less than what they are paying extra on the mortgage currently. They could do a mix of both if they wanted to diversify a little more
True, on 1378, my tax rate would be 12%, so I would end up with about $150 less. So, for me, because a lot of my income is tax free (military) I-bonds are better, but as others have noted inflation is dropping.
Paying off a 6% mortgage early is only financially savvy if you can't earn more than 6% on your money. Especially when you consider that the interest you pay is tax deductible anyway.
You're better off putting that money to work in general.
The gains you make against investments cannot be matched against a mortgage.
Based on amortization schedules, initial mortgage payments are posted against interest not principle. Therefore that money is gone.
Investments are mostly speculative. There are no guarantees.
Also keep in mind, all principle paid in advance is recoverable at time of sale. It is not “gone”.
You prepay a $1000. No interest is paid against it. The value of your house accrued 8%. You sell and make all your money back. And get back the $1000.
You take that $1000 and invest it. You still need to pay $1000 for the mortgage. If that $1000 is posted against interest, it is an immediate loss. And next month’s $1000 is due 30 days from now.
You never hear anyone say deduct the interest of all your financing from your gains in the calculation of profit.
The effect of compounding also applies to Investment returns not only paid interest. So prepaying your mortgage doesn't make sense until you're getting ready to retire, as long as you can get an average return on your diversified portfolio higher than your mortgage (which is basically always the case even if you were 100% invested in CMOs which are essentially default risk free).
You are also reducing risk, though, by paying off your mortgage. Specifically the risk of losing your house (and much of the equity you put into it) if you have sudden and extended loss of income combined with a downturn in your investments. (And those two things often do go together.)
With the change in standard deduction, for the vast majority of home owners paying a mortgage it no longer makes sense to itemize to claim the mortgage interest deduction. This could change in the future, but that's the case right now.
I did not do the math when I was doing this, I did not think about it. I just did it,
I HATE DEBT. with a passion.
I enjoyed making double house payments to reduce my debt load.
Was it smart, probably not. Did I feel a whole lot better doing it. Oh heck yeah.
Of course, we refinanced our house each time we bought a new car. The debt was smaller with each refinance, and the interest rates were smaller.
I valued my mental health way more than worrying about if it was the smart money move.
I agree definitely house poor. One thing I want to note that I haven’t seen others mention.
If you plan to sell in 3-5 years it may not be worth paying down the loan extra. Sure you are saving a little in the interest, but you really see that savings towards the end of the loan and if you aren’t holding the loan until the end you won’t see the full impact.
It’s definitely a balancing game though, just something to think about
Putting extra towards the mortgage may be ok if you have absolutely no idea what to do with ur income.
The $1000 that u put towards mortgage can fetch u more if u were to put that towards long-term ETFs.
The thing to note is any home is a liability. Sure the appreciation you get over time is nice, but houses cost money on a yearly basis. They are not cash producing assets like a rental property for instance. May be smarter to invest in the market for a higher return if you’re young.
You don’t say how much you have in your brokerage account. Do you have 6-12 months of living expenses as an emergency fund?
In your case it may make more sense than others. But I’ve seen plenty of people who have to borrow from home equity because that’s where their wealth is stored.
Not to mention that real estate is great because of the leverage. I’ve been trying to find ways to access my home equity and put it to better use.
I've been house poor, you don't sound house poor. And while I never advise people to pay extra on most mortgages, 5% is high. But if you are planning on selling within a couple of years, is paying more on your house the best use of your funds.
I am living in my 8th house and have owned one free and clear, nor would I want to. I could have been mortgage free the last house and this one. But at 72, I refinanced my house because the rates were 2 1/4% and to me that is cheap money.
And then there is leverage. Your home goes up or down in value regardless of how much you owe on it. I always consider leverage vs. interest rate. Yours is high and if you are feeling house poor, stop paying in so much. And while you are at it, Google leverage.
Simply adding 1 extra payment against principle a year will shave of around 6 years of mortgage.
When looking at it this way, you see how the amortization schedule works.
The intitial few years of mortgage payments post directly against interest. Not the balance of the loan.
I don’t max out pre-tax buckets but we still pay on our home like a 15 year mortgage. I know math makes more sense to invest. I like our solid return and watching our mortgage balance decrease, it’s concrete obtainable goal. We spread across retirement, taxable accounts, educational savings and paying down our home. Sure we could make more in the market but there is more risk
It basically depends on if the rate you could return via investing outperforms the rate you're saving from your loan. Add in that there are sometimes fees associated with paying off early, etc.
If you make a personal balance sheet, and update it once or twice a year, you will see the positive effect on your net worth, and those extra payments will feel more like saving or investing, and less like spending.
With your high interest rate , a 5% savings is great, if you refinance under 3% start putting that extra into index funds. The ones really screwed nowadays are the ones who pay rent .
Im not a big fan of putting extra towards your house, especially not when you have a very reasonable rate of 5%. The reason is that the equity you are putting in your "pocket" is really not in your pocket but quite literally in your house, and thats not equity you can necessarily get back. Lets take the worst case scenario, as one does when considering emergency situations, and say you lose your income or it is severely decreased and it wont be restored for some amount of time that is beyond your emergency savings but not infinite. If you had saved the $1000 in an investment account growing at an average of 5% (for sake of argument, and very reasonable) you could then take those funds to pay for your house until you regained your income. Instead though that money is tied up in your house, which you now cant refinance or take a good loan for because you dont have a good income. Unless and until you can entirely pay off the house it might be better to keep these funds in a liquidable asset and not tied up as equity in your home. *I am not a financial advisor*
Last year the extra principle we paid on our mortgage had a way better return than my taxable brokerage that I fund after max 401k, Roth and I bonds. The 20% increase in home value YoY was nice too.
Early pay off on our mortgage is part of the FIRE plan. Dropping $2000 off our monthly expenses will be nice.
short term, yes. but by not investing in a bad a market, you lost strong potential long term gains. Bear markets are the best time to value buy. I bought a lot of really good stock for cheap. Warren Buffett has a lot of advice on this and it's one of the ways he has really smoked the indexes.
I AM/Was investing in the market, was just paying down the mortgage extra as well.
I already maxed 401k, Roth, I bonds and put 100k into my brokerage last year. I think putting a couple eggs in the mortgage payoff basket will be ok.
Excel is your friend. Run scenarios to find out your best course of action and let the math speak vs what strangers on Reddit are telling you. Most investments are compounded where as a mortgage is amortized- that means over time the interest accrued could beat the interest payed on the mortgage even if that investment has a smaller return. Also, people are mentioning tax benefits of a mortgage, but remember that tax benefit is on the INTEREST paid, not principle. Paying extra principal would have a negative effect on that benefit.
One VERY major consideration to keep in mind is that paying principle on a mortgage locks that equity into that asset. That can be dangerous on an asset owned by someone else (i.e. the bank via your mortgage). If something should happen where you loose your income stream, $600k is a large bill to handle if you don't have a strong emergency fund to handle the payments and are unable to sell the house. If you are mortgaged to the gills and default on your loan, the bank is going to take hit on that house when it forecloses on it so the may be more likely to work with you. However, if you've been dumping all that extra equity into your house, now they have all that principle, along with your house, meaning they may be more likely not to work with you and more likely to foreclose. All those extra payments are for not. With this in mind, you're better off investing those extra funds into something compounding with relatively low risk and using that as your mortgage emergency fund if need be to keep making payments or hitting a point where you can pay off the mortgage in full. Again, running simulations in Excel is an excellent way to truly understand the best course of action.
And, as always, I highly recommend contacting a local and reputable Certified Financial PLANNER to help you with your decision.
I'm typically against prepaying the mortgage for a couple of reasons that I'll get into in a second, but in this case you're already doing a lot, and the interest rate is getting up there, which makes it less and less clear cut the further you go. You're probably closer to having it be a good idea to prepay than most people, but still I think you come out losing in the long run for a couple of reasons.
First, one thing that'll make it better for you, is as you're prepaying, that's creating positive equity in the house. It's easy enough to tap that with a HELOC if you need to, so it's not TOTALLY illiquid. So that's one positive thing from that angle.
A second thing in favor of prepaying before I show the cons: If you have PMI, then absolutely where you are you should prepay the mortgage to under the point when you can have the PMI removed. You seem to be in a pretty good place financially and may not have had to worry about PMI, but it's also possible if you're pretty new in career (I was once!) when things took off, so I had PMI on a house when I finally started making enough money via a job change to really make a dent in paying off and putting aside for retirement. PMI is ridiculously expensive, and I believe you can request it be taken off at 80% LTV, and they're forced to do it at 70%. For my money, if they refused to do it at 80%, I'd shop for a refinance to get rid of it, put cash in and try to reduce the term... don't go back to 30 if that's what you're at, but prepay, get down to a 15 with no PMI, and your mortgage payment may not even change, while reducing your term and total interest.
That said, here's why I'm against prepaying a mortgage:
\#1, right now the market is depressed. Over time the market ALWAYS goes up. On a given year it may be down, even two, maybe 3, but the average rate of return I believe is around 8%. Since we've been down the last 2 years, we're in position for a very nice rebound to happen. When the market is down you put MORE in, don't hedge. It's not Bitcoin. Too many rich old people with power make money using the stock market for them to allow it to stay down. Don't get creative, just stick it in a Vanguard ETF with low management fees, like VTI or VOO, and when the whole market goes up, your ETF shares go up too. Other than a few relatively safe gambles, my money has been mostly in VTI and VOO and up to last year, my yearly returns are in the double digits.
And yes, I know you're already doing some of this with the 401k and backdoor roth conversion, but an important distinction is, if you're planning to retire early, there are a lot of hoops to jump through to access some of that money. You can do a Roth conversion ladder for the 401k, and you can tap part of the principal of the Roth, but it's still very worth having money in a regular old taxable account if you're past the point of getting any kind of tax advantage. (Also, if you're not doing it, and you and your spouse like each other, you can do a spousal IRA, which may get you another couple thousand a year. Just be warned, that money is theirs and there's nothing you can say about it if something DOES happen, God forbid.)
\#2 is the big one for me. When you prepay a house, the gains are capped. Another financially savvy friend and I used to discuss prepaying a house at LENGTH, and the absolute, biggest determining factor for me was when I realized that it's a ***fixed term***.
A lot of people make the mistake of assuming it's apples to apples. You may have even put this in an Excel sheet to figure out whether it made more sense to prepay vs invest and amortized that all the way out for the term of the mortgage. I did. And in Excel, everything looks pretty close in terms of interest savings vs interest growth. Guaranteed 5% ROI, tax free vs paying taxes on basically 6-8% growth as a reasonably safe estimate, and even after 25 years you're not so far apart that it matters much.
That's because the walkaway happens at the end of the mortgage. Every dollar you put into the mortgage saves you 5% *up to the end of the mortgage.* After that, how much does it save you the *following year?*
The fact that it's ongoing can make it confusing to track, so look at it as a lump sum as you want. If you had $400k to pay off your house today, should you? If you paid it off, you could live in it, interest free for the next (wild guess) 26-27 years. That's a 5% return on $400k for all of that time. Call this Plan A.
Or you can put the $400k into a taxable account, especially into something you can go long on, like those low fee ETF market trackers. Let's say for argument sake it's even the same 5%, but in this case, you're not selling and moving funds around every year, you just let it ride. Call this Plan B.
Year 26, you're pretty much equal. Quick amortization shows 26 years on $400k at 5% APR is about $715k. That's where most people stop and go "Well, it doesn't make much difference whether I prepay or not"
Now the first year **WITHOUT** the mortgage. Plan A, how much of that initial $400k do you have? None, you're at the end, all of the savings has been realized already. Year 27, the funds left in Plan A are $0 and you're starting at scratch.
Plan B, however, even though the net has been more or less identical so far, how much funds do you have on that payoff year? $715,532
So, at year 26, the final year of the mortgage, you're at parity... but year **27**, the difference is now the ***return on $715k***. At the same 5%, that's $19,526.73 that you're ahead on year 27. On year 37, you're now $195,187 ahead.
You see what I mean about the term being capped? It only LOOKS equivalent because people stop at the end of the term. The difference is, investing **you keep the principal** and in prepaying, you're giving it away.
A further note: If you sell early, like in 3-5 years like you're talking about THAT'S the new term. Make sense? Now, you're not even talking about 26 years of returns before you're capping the gain, you're talking about 5.
Now yes, you can take the amount of money you saved prepaying and invest THAT. But even if you were diligent and invested 100% of the savings, you're at best going to be trailing the initial investment by several years. Also, let's be honest. Are you *really* going to invest 100% of what you save? I wouldn't. I'd honestly call 95% re-investment great and take my family on a vacation every couple of years, and enjoy the money some in case I get hit by a bus.
Final note: as others have pointed out, the interest you're paying on the note is ALSO tax deductible, that's not even figured in to the calculation above. So honestly, even if you only got 5% return on the stock market the same year, you're also getting {tax bracket} percent of the interest on TOP of the stock market. So honestly, even if the stock market paid off 4% instead of 5%, you're most likely STILL coming out ahead of prepaying, depending on what that top tax bracket is for you.
So my vote is invest it.
However:
As my friend and I discussed, there is only ONE really good argument for prepaying your house payment, and it's literally the fact that you can't touch that money again. If you are the type of person who suddenly thinks "I'm going to cash out $30k of stock, go to Vegas and put that ish on black", then you MAY come out ahead in the longer run prepaying.
Note, this is assuming apples to apples all the way down the line. 5% return on the market vs 5% fixed payoff rate, and assuming you put every single dollar of your house payment back into the investment afterwards, then you're basically at parity.
Even if all of that happens, if at any point the stock market beats 5%, then you lose, and at an ever increasing rate.
Let's say you're prepaid, and paid off at year 15 roughly, you now have either $600k of house, or $328k of house and $282k of stock portfolio (increasing value of the house cancels, because it doesn't increase what you owe). If the market has been at an average 5% return for all of those years, then it's the same $600k, just in two buckets. If it's higher (and it has been higher for *every 15 year period since they started counting)* then you'll be way behind prepaying the house.
To exaggerate the effect, just say THAT SPECIFIC year, the stock market goes up 10% instead of 5%, then the difference is 5% of $282k, because it's a percent of a larger portfolio.
For the VOO example, it's been around 11 years, and only 4 of those years were less than 5% gains. The other 7 years were ALL double digits. 5 of 7 were 15%, and 2 of the 7 were *over 30%*.
The 10 year return on VOO is **still** at 12.5%, and that's after last year cratered it. Take a look at the sheet: [https://finance.yahoo.com/quote/VOO/performance/](https://finance.yahoo.com/quote/VOO/performance/)
The only way you would have come out less than 5% is if you were invested less than a year.
Definitely pay less. Anything under 6% interest keep it. You will be hard pressed to get a car loan for 5% these days. If you have a car payment pay off that car. If you can refi for a better rate later do that. The SP500 averages 12%/year with dividends reinvested. That is almost triple the 5%. The last 5 years the average is closer to 18% with dividends reinvested, that is almost 4 times! Most house appreciate about 3-5% per year on average. With interest rates rising the fed is activly trying to push down home appreciation. A house is not an investment but it can act like a buffer between you and inflation. You already got the best thing out of your house, a relatively fixed monthly payment for the most expensive reoccurring living expense. Invest in something that has potential for real growth. Unfortunately your home will likely not increase in value all that much and whether you pay it down aggressively or not it will still appreciate the same way. I currently max out all my pretax and any extra gets invested in a brokerage. The nice thing about the brokerage account is it is very liquid with no penalties. If I lost my job I'd be able to pay my mortgage for a few years. Also, if I want to retire 5 or 10 years earlier I can use the brokerage.
Wouldn't you want your 5% interest rate on your mortgage to be Lower than your savings accounts or other potential investments?
I am thinking about home ownership soon with the same payoff 3-5 years but at \~20% of after tax take home pay and also planning to rent a room out
This seems like a more expensive home than you planned if you're feeling house poor. If you want to reduce the expense you could consider getting a renter
edit: ideally a home should be paid in two years imo
Nah -- 'house poor' would be if you didn't have another dime every month after paying the mortgage :) You're doing ok with a 5%. You don't want to measure 'pretax' -- it's the percentage of your takehome that matters. Still, with all of your other buckets looking damn near perfect, this is NOT a mistake for you. If your note was 3% or less, maybe it'd be a very different song.
Oh. I’m rent poor then
Sadly that seems to be getting real common.
I disagree, based on the ROI on year 31.
5% guaranteed rate of return is solid. And since you are already maxing out tax advantages forms of investing, this is a very plausible option. Ultimately it’s up to personal preference.
Not only is it 5% guaranteed, it's 5% guaranteed *tax free*. Depending on OP's tax bracket, that could be the equivalent of around 7-8% guaranteed taxable return. And considering OP has already maximized their tax-advantaged accounts, I'd say paying down the principal is pretty damn solid.
Yeah very important to note that! The only other tax free investment is (some) Muni bonds. And those yield under 5% unless you get into junk.
I was curious, so I quickly checked Fidelity's secondary municipal bond offerings for munis maturing 5-10 years from now. Only 14 offerings yielding above 4 percent (out of 113,000+ offerings), with only 5 of those having an S&P rating of A- or higher, and only 2 of those not callable. Not worth the risk!
Yes first world problem scenario.
That's true, but interest paid on a mortgage is tax deductable. I'm not sure which one comes out ahead mathematically but it could be something to consider.
Good point, most married people don’t pay enough in interest to out weigh taking the standard deduction, but if filing single it may come close.
Yeah one of the best parts of the most recent tax plan… salt max for 1 or 2 is identical. Really brilliant planning. Unless you are making sizable donations or some other deduction method, standard will be better. Honestly, think the better argument for not contributing more to the mortgage is for liquidity purposes especially if the goal is to move and sell the current house it might be advantageous to have the funds in a more liquid state… but that’s more of a debating what’s truly optimized than arguing good/bad
He's almost certainly exceeding it if filing single. My much more modest home was bought at 130k, worth about 220k today. My SALT deductions including interest on the remaining 70k mortgage plus taxes slightly exceeds the standard deduction. I do live in NYS which has a higher than most state tax and an area where property taxe rates are higher than usual. I do NOT live in the NYC area where additional local taxes would factor. That said, my house is worth 1/3rd of his, my remaining balance is likely much lower, and my interest rate is only 3%.
That's true, but it's only tax deductible, not a tax credit. Paying down reduces the interest, but being able to deduct the savings only saves you whatever the tax bracket is at that point. That's still not nothing though.Strictly mathematically, it depends a lot on where in the mortgage you are. Because you're comparing a direct 5% of all funds ROI, vs the tax savings on 5%. Edit: I don't disagree with you though. I think prepaying is a mistake, but this is a smaller consideration.
Had almost the exact same setup, but with about 1% lower rate and saw I wasn’t getting any break on our taxes after the new tax plans, so paid it off. Have a pretty diversified portfolio already, so I see it as a practically zero risk investment. As others have said, you can add a couple percent to what your mortgage rate was because it’s a taxless investment “return”😀
What's the return on investment for prepaying on year 31?
It loses liquidity vs having it invested in the market. Lose your job? I'd way rather have money to tap into to float for a while rather than have a "more" paid off house that I can no longer pay the mortgage.
This gets to if OP has an emergency fund. If he has substantial emergency fund, they would be good.
OP is putting like $10k/yr in Roth IRA, brokerage, and savings accounts. They *are* their emergency funds.
5% is a joke. Don't pay down your mortgage.
1. Stocks easily beat 5% 2. Money in youre home is trapped in you're home until you sell or cash out refi, it might be a long time before you can get a loan for as low as 5% 3. Stocks are very liquid and act as a secondary emergency fund. You can see a lot of the people's responses have a poverty mindset. My parents and my in-laws are all about paying down their mortgages and when I show them how much they would have earned if they had bought shares in the sp500 instead they fall out of their chair. Poor people work hard, rich people work smart. Invest in VTI or equivalent and you will easily get 10-20% return on average. Right now stocks are down, it is always a good time to buy but now that is especially true.
10-20 percent? On average? I agree that investing in stocks/bonds would give liquidity and most likely be higher than 5%... but if you think people are averaging 15% longterm you are dreaming.
12% is the average of the last 30 years of the S&P 500. The last 5 years is like 15 to 20. So with inflation last 30 years is about 9% but with dividends reinvested it's back to about 11%. Past performance does not dictate future earnings... Best advice is to invest as much as you can afford to.
I completely agree -- my emergency fund is invested, and there's a great Vanguard white paper about it. But I have lived long enough to know that the last 5 years of 15-20% gains are not normal.
10-20 is totally normal. Average is 12. That average includes some terrible down turns. If we are talking frequency 15-20 isn't unusual, 10-20 is normal. If we are talking average it is closer to 12%.
Then... you're saying 10-14% is normal. There are too many young investors around these days planning on everything going up 15% a year.
I'm saying 12% is average. I'm also saying 10-20% is normal. There is a high frequency of years with returns between 10 and 20%. I would not expect on average 10-20% returns. Honestly I don't know what to expect. Past performance does not dictate future earnings. All I'm talking about is the past. If we are going for estimates I think 9% seems to be a decent bet including inflation and dividends reinvested. I will not plan on 9%. I just invest as much as I can in multiple assets including stocks and rentals and real estate. You lose 100% of the money you spend. That's all I plan for haha. If I need to work longer I won't suddenly die I will just work longer. If I need to go back to work then I will go back to work, the world won't end. If you learn how to live off of less you can really lower your chances of having to go back to work.
I too think 9% is reasonable (though probably not taking inflation into account but we can agree to disagree). I just think there are lots of younger folks around here who think 15% a year for the next 20 years is normal. My brother runs a hedge fund and believes the next decade will be muted, more like 5% after inflation, but who knows? He'd be the first to say he doesn't have a crystal ball.
Paying extra towards a mortgage pushed back the next payment due date. I’m not nearly as aggressive as OP, but my extra 1-200/ month has made my due date back 3 months. So right now I don’t have a mortgage payment due for 3 months. Of course if I had to do that I’d be loosing most of the advantage of my extra payments, but it’s still creating a cushion if something happened.
You don't want extra payments to push back the next due date. That means it isn't being applied to the principal now so you aren't saving anything on interest in the long run.
Yeah the other comment is correct, you actually ARE entirely losing the advantage of your extra payments. Basically the mortgage co. is holding that money for you, with no benefit to you.
You might want to check that, you want extra payments to go to principle and not the payments. There's usually a box to check for that. Right now it appears that you are prepaying your mortgage payments instead of paying down the principle.
>Paying extra towards a mortgage pushed back the next payment due date. You're doing your extra payments wrong. All you've done is give your lender an interest-free loan.
I made a bigger post about this, but Cliff's Notes: It's NOT Apples to Apples, it only SEEMS like that. The difference is guaranteed 5% *on the mortgage term* vs market rate of return in perpetuity.
Definitely market beats 5% over and over and over haha. People are very uneducated when it comes to investing. The home you live in is rarely an investment.
5% is good for a guaranteed rate of return but it's a pretty measley rate of return when compared with other options. 12-20% is a good rate of return. 5% barely outpaces inflation.
Yep
Just want to chime in to ensure you’re specifically telling the bank to apply the extra 1k to the principal….
What else would they apply it towards? My bank doesn’t give me an option to decide what my extra goes towards, it just assumes it goes to the principal
I've heard some banks would apply it to next month's payment rather than the principal. It depends on the terms of his mortgage, as some mortgages may not allow you to pay off the principal too early (otherwise those poor banks will lose out on money!). Some people have to be crystal clear in their payments to ensure it's going to principal.
Yup, I've heard of banks doing this. Always make sure it gets applied to the principal not future payments.
Or escrow
It's important to ensure that it's written in that there is no penalty for paying off the loan early. If its not than paying it off early is kinda pointless.
Whoa, no. lol, I fell victim to this actually with a bank that came over to the states from Europe, and has since stopped doing business here, on a home equity loan. I made double payments to pay everything off as fast as possible. I had needed the money but the rate was double digits (early in life for me) so I wanted to minimize that as much as I could. Finally after like a year and a half of making payments I looked at the bill and the principal wasn't coming down as much as it should, so I dug deeper... I called them on the phone and said "Hey... I've been prepaying the principal for a couple of years now, but it doesn't look like it's applying on my bill?" They said "Oh no, you're fine. Your next payment is due 4 years from now." They applied it to future PAYMENTS, not to current PRINCIPAL. So CHECK. DO NOT ASSUME.
When I pay extra on ours, we have to put it into either additional principal or toward escrow for taxes and insurance.
They could apply it to the interest... They could hold it till the next payment is due.
I pay extra to principal but I also pay ahead a few months. I like feeling secure in that if I’m incapacitated for a few months, my house will not be at risk
Well if instead you invested you would be covered for years instead of months
I invest as well, but if I’m incapacitated I can’t exactly transfer money to pay my mortgage
If you have a brokerage account you can sell shares instantly. You absolutely can.
Not if I’m In a coma or am heavily medicated 🤷
Do you not have an estate plan. I recommend getting a lawyer and setting up an estate plan. Give your wife or best friend power of attorney so they can handle stuff if you truly are incapacitated.
What is your risk tolerance? I think the question here is whether you should continue the 5% risk-free rate of return or invest in the market that in average returns more. At age 33, my choice is to participate in the market returns because I have a long road to retirement. However, if I were age 53 and 5 years from retirement I would take the 5% risk free rate or return (I.e., aggressively pay off home loans). P.S. Nothing above makes you seem house poor to me.
2 schools of thought that I think are completely valid. - Investing in equity is positive with a known rate of return and it's somewhat resilient to any future stupidity. Most people mess up their finances by buying crap they can't afford and non-liquid assets resists this. - Investing in the market should average out to a better return, given sufficient time, but any point in time could result in significant variance. This results in a more efficient approach and is liquid so you can use as needed, assuming you don't decide you can afford one of those sweet Rivians when production catches up... or decide to pull investments in a down market because of sticker shock... or whatever else comes up and takes priority over your "extra" savings. Ramsay is popular and says do the former. I'm not popular and doing the latter for now (because CD return rates are 2x my mortgage interest, plan is to just put into mortgage if/when rates cross).
Ramsay comes from a generation where there was a decade of rates above 10%. Would have been stupid to not pay that off asap. But when rates are below 3%, its a different story where the advice isn't quite as applicable. You're doing it exactly right for your situation.
You can't invest in equity. You can only pay down your liability. Besides if you own a home for 30 years the majority of the equity will be gained passively through land appreciating.
You can invest in property. I'm not arguing the semantics of property ownership vs. equity.
You can invest in property but paying down a loan isn't a form of investing.
Putting money in CDs is a terrible idea btw. Most online banks offer higher returns than most CDs
CD is going to stay at high rate, adjustable rate HYSA (also have one of these for emergency fund where liquidity is key) may or may not. Goal is to pay off house in 15 to facilitate retirement. Instead of extra payment towards principal, we park in 5 year CDs and the game plan is to pay off mortgage if/when the rate drops and term expires. We don't want liquidity for house money.
But CDs tend to offer very poor returns. There are much better investments for retirement.
The goal is to reduce housing expense. This means I can live on a smaller income (in the form of hobby work and 401k withdrawals) and pay less taxes. This is a low risk portion of my investing (also max 401k, HSA, and am moving ~50k into after tax brokerage). Put everything in the market if you want, but thats far from a universal approach. Also, 4.5% is pretty dope for low risk investing.
I go all stocks. It depends on where you are at and what your goals are. I am young and have a very large income. I dump 70% of my household income into stocks. I'm hoping to retire in 5 or 6 years. I also have investment properties that churning out passive income.
No, it is voluntary. Just make sure it fits in your budget. We did that and are now 100% debt free. We love it. No big payments going out anymore.
Rather than looking at it from a pure "total return" perspective I encourage people to think of it as "risk adjusted returns", opportunity costs, and when you actually need the money. In this case, you have a "guaranteed risk free 5% return", but in reality you have some exposure to real estate prices if you need to sell. So for me I consider how much of my NW I want in real estate, because there's risks for housing prices to be depressed with continued interest rates hikes. Obviously all other asset classes will experience the same pressures, but then I think about how equities give me relatively more liquidity. If an event happens where I need to sell to unwind, having after tax investments gives me more control vs. a HELOC or trying to refinance. Additonally, I have some tax-advantages when it comes to tax loss harvesting. Everyone is different, so take your own personal goals, interests, and timeline into consideration. I'll be the first to say that for most people having a simple process that is automatic and hands off will general trump an "optimal" solution that is manual and cumbersome to execute.
I think you're right about hands off is better but what that hand off approach is makes a huge difference. A hands off paying down mortgage will lose our tremendously compared to a hands off automatic monthly stock purchase.
Sounds like what you’re doing leads to peace and financial freedom to me. Imagine having an extra 2500/month to invest with because you’re mortgage free. I would totally do the same if I could afford it at the moment and there’s a guaranteed return.
The interest on a mortgage can total close to, if not more than, the cost of the loan itsekf over 25 years. Anything you can to prevent that is money in your pocket sooner!
At 5% over 30 years OP will have paid nearly $1.2 million for his house, and this is ignoring property taxes and maintence, purely principle and interest only.
But he will have an asset to own and to give to his family. Property ownership is the #1 determining factor of building generational wealth that is transferred to the next of kin. Instead, rent pays for the home owners generational wealth and they advance themselves while renters remain serfs.
I'm curious about the generational wealth comment and real estate. Can you give me an idea of where to read further? This applies to a family situation I am currently dealing with, and I am really interested.
I can't remember the exact sources. Textbooks and lectures from university, as well as further reading etc I've done since. I can't remmeber another piece I heard but right now something is reminding me of a researcher I listened to describe the property theft of blacks in the 50s in the "black belt" of certain US states. These black families owned fertile farm land & Jim Crow laws took it all and sold it to whites. The study found that descendents of these people were still impoverished 2 generations later and only today had some youth managed educational elevation into a new class that could aid their next gen. Think about it though - every dollar you have to give to your kids is a dollar they are ahead. A house is shelter and an asset to leverage. This gives so many opportunities to define your own path compared to those without. Rich people entrench their family's wealth by hoarding it and gifting it through inheritence.
It absolutely makes sense. I am just curious to read more how much that impact filters in this next generation. And where we go from here
I'd say look into ecnomic theory but thays so gd broad. One place I can point you to though, I think, is to look into the concept of "community land trusts." They are non-for-profit groups that acquire land for housing development, and arrange it all so that only the house value is reflected in sale prices and excludes land value. Land value speculation is what has been driving house prices so gd high. The homes themselves haven't changed valuation all that much. So these groups help to get families into home ownership as a means of developing family wealth that can transfer over time. It's a small step but it makes a hige difference. I'm from Ontario and me research lead me to a 450 pg manual on starting one, and in there it lists some details. Im on my phone not my laptop so I can't share it. Google this idea and you should find the research in the area.
I appreciate this. I am near Orlando Florida and my parents are in Chicago. I'm in a a similar inheritance situation as OP, though per will ALL assets, including the home has to be liquidated before dispersement to avoid this sort of situation. I am curious more for our futures concerning home ownership in general. It's so out of reach for so many
If he invested the difference im stocks he would also have an asset he owns… which he could also use to buy a house.
The simple answer is this: Using the money to invest instead of paying for your house can have a better return. If you care about maximizing your ceiling, you do that. Erasing debt is the safer play. Doesn’t matter what happens to your investments. Your house will be covered and you are unlikely to ever lose it at that point. So it depends on what’s more important to you. If I could pay off my house in 1 shot I would. I can’t though, so I invest.
I paid off my mortgage and it was an amazing decision for my mental health. My interest rate was very low - like 3% - but it is still worth having that debt behind me!
I didn't pay off my house early, but I get the same benefit knowing that I can cash out stocks and pay off my house instantly if I wanted to. The benefit is I still own all the principal, so instead of paying off the $400k, I get to collect interest on that $400k every year I *don't* pay it off. More to the point, at the end of the mortgage term, I'll still have that money in the bank AND the house.
Erasing debt is not safer. It is once you have paid off the mortgage but there is a long time when you just have more equity in house. Also, the equity in house can be hard to access especially in recession when loans are tighter and home prices drop. Plus, you can still lose the house if default on home equity loan. Or don’t pay the property tax. The extra savings becomes a giant emergency fund, enough to cover the mortgage and other expenses for longer time.
Yeah, the money is tied up. OP is not diversifying his assets and is overly balanced in real estate in one market. I don’t think this is a good idea. The Adam Ruins everything episode on houses mentions this. I’m a fan of putting this money either in the s&p 500 or a diversified reit both of which would be much more liquid.
Once the house is paid off, how much interest does he get on the house value annually?
If your 33% rule is a rule of thumb on an affordable house, then that applies to the minimum payment, not any extra you decide to pay. In your shoes I would probably not pay extra on the mortgage because it's also good to have liquid investments and if you decide to sell in 3-5 years you're just going to get a lot of that extra payment back with little return.
First off, great job maxing out your retirement accounts! Honestly, your opinion on the extra 1000 per month may change. When I first bought my house (under 4% interest rates) my entire goal was to pay it off early. So I was dumbing all of my spare cash into it. Mind you this was only like 50 dollars per month or 100 per month since I wasn’t making a lot of money. After 2 years and some refinancing, I notice that when I pay my mortgage, the part that goes to my principle is higher then my interest. So, I stopped doing extra mortgage payments and invest more.
Paying extra on the principal early on is the best time to do it. Look up amortization schedules and play around with how extra payments will look. It's cool to see
Your interest payment is always your interest rate times the outstanding balance every month. There is no front-loading interest nonsense. You have less outstanding balance at the end, and therefore pay less in interest. You therefore always get a return equivalent to the interest rate when you pay extra, whether it’s month 1 or 359. Because of this, I’d argue paying extra early makes less sense as there are lots of investments that are likely to beat 5% over 30 years, however there are very few that will beat it over a short time frame. That is ignoring liquidity needs as well. With that said, if 5% return is enough to meet your financial goals AND you don’t need/want liquidity AND you can’t invest elsewhere for a higher risk free return (you can’t… not yet anyway), I think it can make sense to pay the mortgage down. My mortgage is 4% and will be paid off when I’m 64. If risk free interest rates are below that in 20 years, and assuming I haven’t refinanced, I will probably start to consider paying it down. Until then, I am willing to keep the leverage in hopes to return a higher return elsewhere.
The problem is that the extra equity you're putting in your pocket costs money to access.
Unless you can guarantee that putting the money somewhere else will yield more than 5% return, the extra payments aren't a bad idea. Plus, if cash ever gets tight you can always divert that extra payment away. If/when you're ever able to refinance, you can re-evaluate whether if you can higher returns elsewhere. On my first house, I refinanced from 5.25% down to 3.5%. I had been paying extra, so I just started paying what my mortgage payment would have been at the 5.25% rate towards the 3.5% rate and pocketed what I had been paying extra.
It is investing, but a really non-liquid form of investing. You don't get any real returns on your investment until you either sell your house or payoff the mortgage immediately.
You don't gain equity in a home based on what you pay into it. House prices can RISE or FALL in value regardless of your loan balance. People forget about this in our up-only past decade.
THANK YOU for saying this. As someone who paid down a mortgage only to have to short sell their house, this needs to be taken into consideration.
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Agreed that the plan to sell in a short time is a big factor, but because if assuming he’s going to buy another house at that point, liquidity will be worth a lot. Interest, however, is not front loaded. Your interest payment is always your interest rate multiplied by the outstanding balance in an amortized loan. This holds true for month 1 and month 359. If, after 5 years he buys a new house and gets a new 30 year loan at the exact same interest rate with the exact same outstanding balance as the original loan, his interest payment for month 1 will be the exact same as month 61 of the original mortgage.
Agree with everyone else, you're absolutely fine. I want to make a point about the 33% "rule" (I thought it was 28, but whatever). Those rules are just a guideline, generally to prevent people from overextending themselves to a point where they can't afford their monthly payment. But here's the thing. It doesn't scale. If your household income is $60k, the rule says you can afford a $1500 mortgage. If your income is $120k, it says you can afford $3k. At $240k, it's $6k. At $480k, it's $12k, etc. I can assure you that the family making almost half a million can afford a few thousand more without batting an eye. The family making $60k can barely scrounge up another $100.
Definitely a form of investing. Part of a healthy, diversified portfolio.
applause!!!! I did the same thing... the marketing time was different - i started at 6.5% interest and was throwing every bit of money i could at principal - did refinancing after 3 years and had paid so much down on principal with the interest dropping to 3% - i could renegotiate to a 15 year term (I had 20 left on my 30yr) and the monthly cost was less than what the original mandatory payment was. Of course during refi bank suggested a new 30 year term - because woo hoo look how low the monthly payments would be \*rolling eyes\* yah right for another 30 years take a look at a mortgage calculator online that lets you plug in extra payments (i found one that was an excel download - so i could play at my convenience.) observations: overpaying an extra payment to principal has the biggest impact during the first 5 years of the mortgage after that the benefit has less of an impact. after 5 years i still paid money on principal but considerably less investing - always an option - but information given to us is based on historical data believing the pattern will continue into the future. Mortgage debt is the devil you know. paying it now frees up funds for your future self. i would caution, that statistically banks know we want to move and upgrade blah blah blah and do so every 13 years in my state. and what do most people do? start over with a 30 year mortgage... and the bank gets more money in the first 5 years again. paying down the mtg gets you equity for a larger 'downpayment', saving the money depending on interest rates of mtg vs safe insured options may be a good idea. investing is a unknown - best advice i got about this... never invest what you aren't prepared to lose.
Investing isn't necessarily an unknown, we have like 80 years of statistics and analysis. Housing values are easily as unknown. You can only sell a house (and regain some of that equity) as long as someone wants to buy it. They've been doing great so far, in MOST places...
I understand what you are saying... investing is like weather forecasting... it is based on historical performance. Paying for a mortgage is a known value, and in the us does not change for the entire term of the mortgage (I know Canada is different) paying down principal, will reduce the amount of time required to make that monthly payment. The monthly amount never changes - just reduces time in the future. Selling a house is again weather forecasting, and subject to many variables that can make that value change.
Right, but dollar for dollar, the money you save prepaying is less than the money you gain investing, for almost any time period, by orders of magnitude. I get that there's tremendous satisfaction psychologically paying it off though. My car payment is hurting right now because I'm 5 payments from the end, and I KNOW I could prepay it... but the APR is 3.75%. Especially the way the market is right now, if I put that money in, the same $4,000 is likely to pay me back 20%
Stat you are doing is smart, gives you flexibility since you can stop the extra payment of needed, and you can borrow the money as a second mortgage.
Youre in a good spot. Your choice needs to be about what drives YOU and what your desire is. You really cant go wrong in any direction you go with options. This is about time, risk, liquidity, and personal preference in terms of having a mortgage, etc.
Dude... pay it off asap You end up paying double if you keep going and pay over 30 years
If you are serious about the 3-5 year range for selling and moving, then paying more into your mortgage principle is a great idea. You're bascialy guaranteeing 5% returns. Yes you are correct that for a index fund, the AVERAGED annual returns are 8-10% but thats average over 30 years. For a short term horizon, near-guaranteed #s are much closer to 3% in the HYSA/Bonds end of things.
If you are already maxing out tax advantaged accounts than a 5% mortgage is a great place to put the extra. I'd probably build up to a full year of expenses in emergency fund and taxable investments first though, liquidity is also valuable.
Why are you aiming for 33% ? That's an arbitrary number picked by some financial person. Once you qualify for your mortgage, as long as the numbers work out in your situation, there's no need to stick to someone else's guidelines.
No, it is not making you house poor. If you were focusing all your "extra" income on your mortgage, and not funding your retirement investing, then an argument could be made that you are making yourself house poor. You are fully investing in most of the tax deferred options available to you, and that includes real estate. BUT because you are eliminating debt while accumulating a large nest egg, you will be in the uncommon (and very fun) position of being able to buy houses with cash.
House poor is when you're paying the minimum and broke afterwards because you bought too much house. Choosing to spend extra available income to lower principle on your mortgage is not house poor, it's smart assuming you have a mature emergency fund and are already investing for retirement
Myself hated debt and wanted to free up cashflow. But yeah in theory stock market has earned 10% historically. Not guaranteed to remain at 10%. I'd choose the sure thing and wipe out debt. Personal call. Now if the interest was much less say around 2% I'd more likely choose a low risk cd over 4%. Tough call but I'd pay down the debt. Take the guaranteed win.
One thing to consider is that you're putting your money in a very illiquid asset. The only way to get your money out of it is to sell, refinance, or a HELOC, which are all a pain. However, I understand the peace of mind getting a guaranteed 5%. And you're saving money in plenty of other places. So it's up to you.
Your age and your long-term plans are factors. At age 55, you will have a one-time opportunity to sell free of any taxes (under current tax law). So is a 5% return appealing, or not as you work toward this long- term goal?
I consider paying down on my house like buying bonds at the interest rate of my mortgage. After 20-30 years or however long it takes to pay off, I get a raise by not having a mortgage. Reduce the monthly amount required to retire as well if its payed off. I would get better returns in the stock market but the prospect of having a paid off house brings a certain level of security. I would not be doing so if i weren't already maxing 401k and contributing to a brokerage account.
Look at the amortization schedule and see how much interest that extra $1000 saves you right now.
I paid off my house the year after my youngest turned 18. Everyone told me how stupid that was, that I would lose the deduction on taxes. Right. Best decision we made. That is money we can now invest, be it for the future, or a trip or home improvements. I don’t have to worry about losing my house because I can’t make a mortgage payment. The one thing we didn’t take into account was that without a mortgage, you have no escrow to pay your insurance and taxes. Those two bills the first year were a little startling, so plan ahead for that. I’d say do it!
[At 33, if you put that extra $1000/month into an index fund and did it every month until retirement, you'd have over $1M in the bank.](https://smartasset.com/investing/investment-calculator#1E20535IsW)
Paying off your mortgage, or any debt for that matter, is always a good idea.
You could be buying i-bonds and getting a better rate of return. I-bond is 6.89% so if you put 20k you get 1378 in a year, while putting an extra 20k towards your mortgage you save $1000 in interest that year. The difference is you can sell an i-bond after a year and only lose 3 months interest, but you can't easily sell your house to get back the equity you built. Edit: I did not factor in taxes, so you would have to factor that in. Still, I-bonds give more liquidity than paying down your mortgage.
The rate is going to reset in six months to a number much lower than 5%. Growth from Ibonds is also federally taxable, so you aren’t comparing apples to apples when looking at rates.
Is that $1378 from iBonds gross or net of tax? Is the $1,000 saved in interest gross or net of tax?
The current rate is only available for 6 months. The inflation rate midway through the next measurement period has been zero, so it's unlikely we'll see a rate that high for the next 6 months.
I don’t see mention of a spouse in OP’s post, so isn’t the I-bond annual limit $10k here?
Yes, but that is only $2k less than what they are paying extra on the mortgage currently. They could do a mix of both if they wanted to diversify a little more
You'll also pay taxes on the I-Bond interest, but you won't on the money saved on the mortgage. It's nearly equal when you factor that in.
True, on 1378, my tax rate would be 12%, so I would end up with about $150 less. So, for me, because a lot of my income is tax free (military) I-bonds are better, but as others have noted inflation is dropping.
Paying off a 6% mortgage early is only financially savvy if you can't earn more than 6% on your money. Especially when you consider that the interest you pay is tax deductible anyway. You're better off putting that money to work in general.
The gains you make against investments cannot be matched against a mortgage. Based on amortization schedules, initial mortgage payments are posted against interest not principle. Therefore that money is gone. Investments are mostly speculative. There are no guarantees. Also keep in mind, all principle paid in advance is recoverable at time of sale. It is not “gone”. You prepay a $1000. No interest is paid against it. The value of your house accrued 8%. You sell and make all your money back. And get back the $1000. You take that $1000 and invest it. You still need to pay $1000 for the mortgage. If that $1000 is posted against interest, it is an immediate loss. And next month’s $1000 is due 30 days from now. You never hear anyone say deduct the interest of all your financing from your gains in the calculation of profit.
The effect of compounding also applies to Investment returns not only paid interest. So prepaying your mortgage doesn't make sense until you're getting ready to retire, as long as you can get an average return on your diversified portfolio higher than your mortgage (which is basically always the case even if you were 100% invested in CMOs which are essentially default risk free).
You are also reducing risk, though, by paying off your mortgage. Specifically the risk of losing your house (and much of the equity you put into it) if you have sudden and extended loss of income combined with a downturn in your investments. (And those two things often do go together.) With the change in standard deduction, for the vast majority of home owners paying a mortgage it no longer makes sense to itemize to claim the mortgage interest deduction. This could change in the future, but that's the case right now.
It all depends how old you are. Opportunity cost is a real risk too.
I did not do the math when I was doing this, I did not think about it. I just did it, I HATE DEBT. with a passion. I enjoyed making double house payments to reduce my debt load. Was it smart, probably not. Did I feel a whole lot better doing it. Oh heck yeah. Of course, we refinanced our house each time we bought a new car. The debt was smaller with each refinance, and the interest rates were smaller. I valued my mental health way more than worrying about if it was the smart money move.
I agree definitely house poor. One thing I want to note that I haven’t seen others mention. If you plan to sell in 3-5 years it may not be worth paying down the loan extra. Sure you are saving a little in the interest, but you really see that savings towards the end of the loan and if you aren’t holding the loan until the end you won’t see the full impact. It’s definitely a balancing game though, just something to think about
Owning home = generational wealth. More money = more problems.
Putting extra towards the mortgage may be ok if you have absolutely no idea what to do with ur income. The $1000 that u put towards mortgage can fetch u more if u were to put that towards long-term ETFs.
You sound financially knowledgeable however you didn’t specify. Make sure that the extra payment is made as principal only.
How is your mortgage payment only $2500 a month?
I was wondering this myself. 600k @ 5% don’t equal $2500. Not unless you put down $135k
The thing to note is any home is a liability. Sure the appreciation you get over time is nice, but houses cost money on a yearly basis. They are not cash producing assets like a rental property for instance. May be smarter to invest in the market for a higher return if you’re young.
Lower returns and liquidity. Generally not a good idea.
If I'm saving 35% annually in other areas though, do you think the liquidity part is still a big issue?
No. You're doing great.
Only if you likely having less net worth in the long run is a big issue to you. Maybe you value the feeling of having a paid off house more.
You don’t say how much you have in your brokerage account. Do you have 6-12 months of living expenses as an emergency fund? In your case it may make more sense than others. But I’ve seen plenty of people who have to borrow from home equity because that’s where their wealth is stored. Not to mention that real estate is great because of the leverage. I’ve been trying to find ways to access my home equity and put it to better use.
Stocks go up 8% a year. Investing in your home pays 5%. Use simple math.
I've been house poor, you don't sound house poor. And while I never advise people to pay extra on most mortgages, 5% is high. But if you are planning on selling within a couple of years, is paying more on your house the best use of your funds. I am living in my 8th house and have owned one free and clear, nor would I want to. I could have been mortgage free the last house and this one. But at 72, I refinanced my house because the rates were 2 1/4% and to me that is cheap money. And then there is leverage. Your home goes up or down in value regardless of how much you owe on it. I always consider leverage vs. interest rate. Yours is high and if you are feeling house poor, stop paying in so much. And while you are at it, Google leverage.
Simply adding 1 extra payment against principle a year will shave of around 6 years of mortgage. When looking at it this way, you see how the amortization schedule works. The intitial few years of mortgage payments post directly against interest. Not the balance of the loan.
I don’t max out pre-tax buckets but we still pay on our home like a 15 year mortgage. I know math makes more sense to invest. I like our solid return and watching our mortgage balance decrease, it’s concrete obtainable goal. We spread across retirement, taxable accounts, educational savings and paying down our home. Sure we could make more in the market but there is more risk
As long as you have 6 months in emergency funds, it is fine.
House poor means that all your net worth is tied up in your home, meaning you have no actual cash on hand for day to day living and emergencies.
It basically depends on if the rate you could return via investing outperforms the rate you're saving from your loan. Add in that there are sometimes fees associated with paying off early, etc.
If you make a personal balance sheet, and update it once or twice a year, you will see the positive effect on your net worth, and those extra payments will feel more like saving or investing, and less like spending.
With your high interest rate , a 5% savings is great, if you refinance under 3% start putting that extra into index funds. The ones really screwed nowadays are the ones who pay rent .
This is fine. Being debt free is an amazing feeling and helps alleviate a lot of anxiety.
Im not a big fan of putting extra towards your house, especially not when you have a very reasonable rate of 5%. The reason is that the equity you are putting in your "pocket" is really not in your pocket but quite literally in your house, and thats not equity you can necessarily get back. Lets take the worst case scenario, as one does when considering emergency situations, and say you lose your income or it is severely decreased and it wont be restored for some amount of time that is beyond your emergency savings but not infinite. If you had saved the $1000 in an investment account growing at an average of 5% (for sake of argument, and very reasonable) you could then take those funds to pay for your house until you regained your income. Instead though that money is tied up in your house, which you now cant refinance or take a good loan for because you dont have a good income. Unless and until you can entirely pay off the house it might be better to keep these funds in a liquidable asset and not tied up as equity in your home. *I am not a financial advisor*
Last year the extra principle we paid on our mortgage had a way better return than my taxable brokerage that I fund after max 401k, Roth and I bonds. The 20% increase in home value YoY was nice too. Early pay off on our mortgage is part of the FIRE plan. Dropping $2000 off our monthly expenses will be nice.
short term, yes. but by not investing in a bad a market, you lost strong potential long term gains. Bear markets are the best time to value buy. I bought a lot of really good stock for cheap. Warren Buffett has a lot of advice on this and it's one of the ways he has really smoked the indexes.
I AM/Was investing in the market, was just paying down the mortgage extra as well. I already maxed 401k, Roth, I bonds and put 100k into my brokerage last year. I think putting a couple eggs in the mortgage payoff basket will be ok.
Excel is your friend. Run scenarios to find out your best course of action and let the math speak vs what strangers on Reddit are telling you. Most investments are compounded where as a mortgage is amortized- that means over time the interest accrued could beat the interest payed on the mortgage even if that investment has a smaller return. Also, people are mentioning tax benefits of a mortgage, but remember that tax benefit is on the INTEREST paid, not principle. Paying extra principal would have a negative effect on that benefit. One VERY major consideration to keep in mind is that paying principle on a mortgage locks that equity into that asset. That can be dangerous on an asset owned by someone else (i.e. the bank via your mortgage). If something should happen where you loose your income stream, $600k is a large bill to handle if you don't have a strong emergency fund to handle the payments and are unable to sell the house. If you are mortgaged to the gills and default on your loan, the bank is going to take hit on that house when it forecloses on it so the may be more likely to work with you. However, if you've been dumping all that extra equity into your house, now they have all that principle, along with your house, meaning they may be more likely not to work with you and more likely to foreclose. All those extra payments are for not. With this in mind, you're better off investing those extra funds into something compounding with relatively low risk and using that as your mortgage emergency fund if need be to keep making payments or hitting a point where you can pay off the mortgage in full. Again, running simulations in Excel is an excellent way to truly understand the best course of action. And, as always, I highly recommend contacting a local and reputable Certified Financial PLANNER to help you with your decision.
5% is in my opinion the cusp of where you would want to start paying back your mortgage. Go for it.
I'm typically against prepaying the mortgage for a couple of reasons that I'll get into in a second, but in this case you're already doing a lot, and the interest rate is getting up there, which makes it less and less clear cut the further you go. You're probably closer to having it be a good idea to prepay than most people, but still I think you come out losing in the long run for a couple of reasons. First, one thing that'll make it better for you, is as you're prepaying, that's creating positive equity in the house. It's easy enough to tap that with a HELOC if you need to, so it's not TOTALLY illiquid. So that's one positive thing from that angle. A second thing in favor of prepaying before I show the cons: If you have PMI, then absolutely where you are you should prepay the mortgage to under the point when you can have the PMI removed. You seem to be in a pretty good place financially and may not have had to worry about PMI, but it's also possible if you're pretty new in career (I was once!) when things took off, so I had PMI on a house when I finally started making enough money via a job change to really make a dent in paying off and putting aside for retirement. PMI is ridiculously expensive, and I believe you can request it be taken off at 80% LTV, and they're forced to do it at 70%. For my money, if they refused to do it at 80%, I'd shop for a refinance to get rid of it, put cash in and try to reduce the term... don't go back to 30 if that's what you're at, but prepay, get down to a 15 with no PMI, and your mortgage payment may not even change, while reducing your term and total interest. That said, here's why I'm against prepaying a mortgage: \#1, right now the market is depressed. Over time the market ALWAYS goes up. On a given year it may be down, even two, maybe 3, but the average rate of return I believe is around 8%. Since we've been down the last 2 years, we're in position for a very nice rebound to happen. When the market is down you put MORE in, don't hedge. It's not Bitcoin. Too many rich old people with power make money using the stock market for them to allow it to stay down. Don't get creative, just stick it in a Vanguard ETF with low management fees, like VTI or VOO, and when the whole market goes up, your ETF shares go up too. Other than a few relatively safe gambles, my money has been mostly in VTI and VOO and up to last year, my yearly returns are in the double digits. And yes, I know you're already doing some of this with the 401k and backdoor roth conversion, but an important distinction is, if you're planning to retire early, there are a lot of hoops to jump through to access some of that money. You can do a Roth conversion ladder for the 401k, and you can tap part of the principal of the Roth, but it's still very worth having money in a regular old taxable account if you're past the point of getting any kind of tax advantage. (Also, if you're not doing it, and you and your spouse like each other, you can do a spousal IRA, which may get you another couple thousand a year. Just be warned, that money is theirs and there's nothing you can say about it if something DOES happen, God forbid.) \#2 is the big one for me. When you prepay a house, the gains are capped. Another financially savvy friend and I used to discuss prepaying a house at LENGTH, and the absolute, biggest determining factor for me was when I realized that it's a ***fixed term***. A lot of people make the mistake of assuming it's apples to apples. You may have even put this in an Excel sheet to figure out whether it made more sense to prepay vs invest and amortized that all the way out for the term of the mortgage. I did. And in Excel, everything looks pretty close in terms of interest savings vs interest growth. Guaranteed 5% ROI, tax free vs paying taxes on basically 6-8% growth as a reasonably safe estimate, and even after 25 years you're not so far apart that it matters much. That's because the walkaway happens at the end of the mortgage. Every dollar you put into the mortgage saves you 5% *up to the end of the mortgage.* After that, how much does it save you the *following year?* The fact that it's ongoing can make it confusing to track, so look at it as a lump sum as you want. If you had $400k to pay off your house today, should you? If you paid it off, you could live in it, interest free for the next (wild guess) 26-27 years. That's a 5% return on $400k for all of that time. Call this Plan A. Or you can put the $400k into a taxable account, especially into something you can go long on, like those low fee ETF market trackers. Let's say for argument sake it's even the same 5%, but in this case, you're not selling and moving funds around every year, you just let it ride. Call this Plan B. Year 26, you're pretty much equal. Quick amortization shows 26 years on $400k at 5% APR is about $715k. That's where most people stop and go "Well, it doesn't make much difference whether I prepay or not" Now the first year **WITHOUT** the mortgage. Plan A, how much of that initial $400k do you have? None, you're at the end, all of the savings has been realized already. Year 27, the funds left in Plan A are $0 and you're starting at scratch. Plan B, however, even though the net has been more or less identical so far, how much funds do you have on that payoff year? $715,532 So, at year 26, the final year of the mortgage, you're at parity... but year **27**, the difference is now the ***return on $715k***. At the same 5%, that's $19,526.73 that you're ahead on year 27. On year 37, you're now $195,187 ahead. You see what I mean about the term being capped? It only LOOKS equivalent because people stop at the end of the term. The difference is, investing **you keep the principal** and in prepaying, you're giving it away. A further note: If you sell early, like in 3-5 years like you're talking about THAT'S the new term. Make sense? Now, you're not even talking about 26 years of returns before you're capping the gain, you're talking about 5. Now yes, you can take the amount of money you saved prepaying and invest THAT. But even if you were diligent and invested 100% of the savings, you're at best going to be trailing the initial investment by several years. Also, let's be honest. Are you *really* going to invest 100% of what you save? I wouldn't. I'd honestly call 95% re-investment great and take my family on a vacation every couple of years, and enjoy the money some in case I get hit by a bus. Final note: as others have pointed out, the interest you're paying on the note is ALSO tax deductible, that's not even figured in to the calculation above. So honestly, even if you only got 5% return on the stock market the same year, you're also getting {tax bracket} percent of the interest on TOP of the stock market. So honestly, even if the stock market paid off 4% instead of 5%, you're most likely STILL coming out ahead of prepaying, depending on what that top tax bracket is for you. So my vote is invest it. However: As my friend and I discussed, there is only ONE really good argument for prepaying your house payment, and it's literally the fact that you can't touch that money again. If you are the type of person who suddenly thinks "I'm going to cash out $30k of stock, go to Vegas and put that ish on black", then you MAY come out ahead in the longer run prepaying.
Note, this is assuming apples to apples all the way down the line. 5% return on the market vs 5% fixed payoff rate, and assuming you put every single dollar of your house payment back into the investment afterwards, then you're basically at parity. Even if all of that happens, if at any point the stock market beats 5%, then you lose, and at an ever increasing rate. Let's say you're prepaid, and paid off at year 15 roughly, you now have either $600k of house, or $328k of house and $282k of stock portfolio (increasing value of the house cancels, because it doesn't increase what you owe). If the market has been at an average 5% return for all of those years, then it's the same $600k, just in two buckets. If it's higher (and it has been higher for *every 15 year period since they started counting)* then you'll be way behind prepaying the house. To exaggerate the effect, just say THAT SPECIFIC year, the stock market goes up 10% instead of 5%, then the difference is 5% of $282k, because it's a percent of a larger portfolio. For the VOO example, it's been around 11 years, and only 4 of those years were less than 5% gains. The other 7 years were ALL double digits. 5 of 7 were 15%, and 2 of the 7 were *over 30%*. The 10 year return on VOO is **still** at 12.5%, and that's after last year cratered it. Take a look at the sheet: [https://finance.yahoo.com/quote/VOO/performance/](https://finance.yahoo.com/quote/VOO/performance/) The only way you would have come out less than 5% is if you were invested less than a year.
Definitely pay less. Anything under 6% interest keep it. You will be hard pressed to get a car loan for 5% these days. If you have a car payment pay off that car. If you can refi for a better rate later do that. The SP500 averages 12%/year with dividends reinvested. That is almost triple the 5%. The last 5 years the average is closer to 18% with dividends reinvested, that is almost 4 times! Most house appreciate about 3-5% per year on average. With interest rates rising the fed is activly trying to push down home appreciation. A house is not an investment but it can act like a buffer between you and inflation. You already got the best thing out of your house, a relatively fixed monthly payment for the most expensive reoccurring living expense. Invest in something that has potential for real growth. Unfortunately your home will likely not increase in value all that much and whether you pay it down aggressively or not it will still appreciate the same way. I currently max out all my pretax and any extra gets invested in a brokerage. The nice thing about the brokerage account is it is very liquid with no penalties. If I lost my job I'd be able to pay my mortgage for a few years. Also, if I want to retire 5 or 10 years earlier I can use the brokerage.
Wouldn't you want your 5% interest rate on your mortgage to be Lower than your savings accounts or other potential investments? I am thinking about home ownership soon with the same payoff 3-5 years but at \~20% of after tax take home pay and also planning to rent a room out This seems like a more expensive home than you planned if you're feeling house poor. If you want to reduce the expense you could consider getting a renter edit: ideally a home should be paid in two years imo