Pay off mortgage or make monthly payments and invest the rest?

[cowdisciple]

Maybe. It’s harder to reliably beat 6-8% vs 4%. I can beat 4% in a money market.

I’m more at risk on 6-8% investments.

This is where the point SDhunter made about liquidity becomes more important. I too would probably choose to pay extra principal on a 7% mortgage, but I might split off some to put in a bond fund or somewhere more liquid than building home equity. Depends heavily on the rest of the facts and circumstances, especially how much liquid financial assets are otherwise available.

 

[CorbLand]

While we’re considering factors that are not just quantitative, don’t forget liquidity. Liquidity matters. A home may generate a handsome rate of return and look good on paper, but it’s not easily converted into useable wealth. An investment portfolio, otoh, should generate similar returns, but create wealth that is far more user friendly.


I try to explain this concept to my wife regularly when she wants to sink another chunk of dough into some unneeded home renovation. Her logic, “well it increases the home’s value.” My logic, “for who? The kids?”

Liquidity is the reason I don’t make extra payments even though my rate is higher than what I can make in a TBill or HYSA. The ~1% I am paying extra is worth it to me to keep my money where I can use it.

 

[Tahoe1305]

To the point of liquidity. I concur. For me at 42 this is very important. So important that personally I’ve been investing 2/3 taxable mutual funds and 1/3 tax protected retirement funds for a while. I want access to my money in my “middle years”. Don’t want to wait till I’m 60 something.

I’ll get smoked in taxes “maybe” at some point. But the capital gains taxes are worth the “option” to go crazy from 40-60 something years of age.

That brings up another point about diversifying. Having a bit of all (retirement savings, non retirement, real estate, gold, assets) vs only one is a sound strategy.

 

[cowdisciple]

I'll add my own fun conspiracy theory . . . Judging by the general encouragement of big financial institutions and influencers, e.g., Dave Ramsey, it's in their best interest for home owners to pay extra into their mortgages than elsewhere. That safeguards the basis of their investments while lowering the investment pressure in their fields.

I suspect Dave Ramsey is going to be a controversial name check. Tactically, his advice is mathematically suboptimal at just about every point. Big picture strategy, savings rate overwhelms all of these tactical decisions together. So if Dave Ramsey gets people to save, or to save more, he's probably doing more good than harm.

 

[Natebonebusta]

I suspect Dave Ramsey is going to be a controversial name check. Tactically, his advice is mathematically suboptimal at just about every point. Big picture strategy, savings rate overwhelms all of these tactical decisions together. So if Dave Ramsey gets people to save, or to save more, he's probably doing more good than harm.

Ramsey is the 101 of finance, most people in this thread have passed 201 and even 301. Not saying his method isn’t effective, but once you’ve graduated 101 it’s time to go more advanced.

 

[SDHNTR]

To the point of liquidity. I concur. For me at 42 this is very important. So important that personally I’ve been investing 2/3 taxable mutual funds and 1/3 tax protected retirement funds for a while. I want access to my money in my “middle years”. Don’t want to wait till I’m 60 something.

I’ll get smoked in taxes “maybe” at some point. But the capital gains taxes are worth the “option” to go crazy from 40-60 something years of age.

That brings up another point about diversifying. Having a bit of all (retirement savings, non retirement, real estate, gold, assets) vs only one is a sound strategy.

WRT your “Taxable mutual funds”. Be sure to understand capital gain distributions and the pitfalls of embedded capital gains.

 

[WV Mountaineer]

I dont know, I was just looking at adding $100-200 extra a month towards principal. I am @2.99% interest on my house. I am definitely not savvy with money so I will be following to see opinions on the matter.

I’m investing towards a mortgage free existence. I’m in the last house I ever intend to buy. And, my mortgage is all that I owe for. While I’m not taking money from my market and retirement investments, I sure am tightening up the belt to get out from u def it as quickly as possible. I started doing that 2 years ago and at the current course, I’ll be there in a couple years. Lord willing.

 

[sbaker0029]

So if you are making 24 half payments, or 12 full payments, how does that result in one extra monthly payment a year?

You would have to be paying half your mortgage payment every 2 weeks for this to work. 52/2=26 half payments or 13 full payments.

It's not making an extra payment. I can see the confusion.

Paying two payments vs one towards the principal in that short amount of time makes the amount of accruing interest less.
It ends up being a very close equivalent to one full payment in the amount of interest saved per year.

Does that make sense?

When the lady over mortgages at the credit bureau told me about, it made sense to me. I could have been fed a line though, but it seemed to check out.

 

[SDHNTR]

I’m investing towards a mortgage free existence. I’m in the last house I ever intend to buy. And, my mortgage is all that I owe for. While I’m not taking money from my market and retirement investments, I sure am tightening up the belt to get out from u def it as quickly as possible. I started doing that 2 years ago and at the current course, I’ll be there in a couple years. Lord willing.

Just curious… so you’d rather own a $500k home with no mortgage than a $500k home with a $250k mortgage at a low rate and $500k in liquid investments?

 

[HuntHarder]

Just curious… so you’d rather own a $500k home with no mortgage than a $500k home with a $250k mortgage and $500k in liquid investments?

You are not going to convince those guys that need that peace of mind in the back of their head. It's priceless to them.
Makes 0 sense to me, but different strokes, different folks. I'd much rather owe $$ on my house at a sub 2.5% and be making over 4% on my investments with 0 risk. Knowing that i can pay my house off whenever I want to, is what makes me happy. Making money with my money, risk free.

 

[haywoodhunter]

A few observations from someone who isn’t a financial advisor but does work in finance.

1. The fact yall are even discussing this means yall are wayyyyy ahead of the general public as I’ve seen it.
2. If you’re making mortgage payments on anything other than a monthly schedule, please verify with your lender that this won’t throw off your payment satisfaction dates. Each lender will have different servicing software and some will not properly apply these type payments. If that’s the case for you, it’s no biggie it’s easy to just roughly calculate how much extra you plan to be going to the loan and make monthly principal payments.
3. As someone else mentioned, it’s extremely important to practice what you preach. What I mean is there’s lot of folks who’ll say “oh yeah I’m not paying it down cause it’s such a good rate so I’m gonna instead put that money to work for me”. Well, from what I’ve seen, there’s a huge percentage of people who say that then just spend the money on stuff.

As for me? I’ve got a 20 year fixed rate at 2.07% and the same institution my mortgage is with is currently offering 24 month cd’s at 4.4% so guess which option I’m going with

Also. There’s lots of people saying bi monthly payments. Term you’re looking for is “semi monthly” payments. There’s also bi weekly. Bi weekly=26/yr. Semi monthly=24/yr

 

[bowhuntercoop]

You are not going to convince those guys that need that peace of mind in the back of their head. It's priceless to them.
Makes 0 sense to me, but different strokes, different folks. I'd much rather owe $$ on my house at a sub 2.5% and be making over 4% on my investments with 0 risk. Knowing that i can pay my house off whenever I want, to is what makes me happy. Making money with my money, risk free.

My farm is 2.4% 15 yr Va loan, instead of paying it off I used the cash from the last house remodel / sale. I purchased land and 2 more rentals with cash.

I retired at 37. All I do now is manage my rentals and investments and stay home will with the kids. I’m fine paying my monthly mortgage for 11 more years while making easy money that’s double the rate on the mortgage, risk free investments like you said.

I won’t ever be filthy rich, but working for myself and not answering the man at a young age sets well with me.

Some of my buddies don’t understand why I drive a 20 yr old diesel and wanna buy older houses to remodel. Yet they work 50-60 hours a week, never see their family and are swimming in debt. They have brand new toys and cars and trucks though….

 

[BravoNovember]

A note on biweekly payments

We made (1) additional full payment and now make bi weekly payments. We will pay off our house almost 6 years early and shave off $90k+ off the loan if we carry it to term.

I’d highly recommend people look into it. It’s a far cry from paying off a mortgage outright, but still provides the opportunity to invest elsewhere and pay off mortgage faster.

 

[StuckInTheEast]

I didn't read through 9 pages so if this is repetitive I apologize.
My take is that long term there is no way I'd pay off a sub 4% or especially a sub 3% mortgage vs investing that extra money and just riding it out...it just simply does not add up. Even secure investments will outperform those rates. Especially folks under 3%...crazy to pay off instead of invest, your littlerally robbing yourself for percieved peace of mind in the present.
As for those citing the risk associated with investing...one must use some judgment in the matter but you can still keep your peace of mind of you do so... Personally if I have the cash to pay off the house, that's going into secure investments...if shit hits the fan and I need it, it's still there and accessible but it's earning at or near twice what I'm paying in mortgage interest in the process.

To put simple numbers too it just for example sake...
If you had 100k mortgage at 2.75% over 30 years your paying just under $47k in interest over the life of the loan.
If you put that $100k into an investment that yields even 4.5% over that same 30 years...you earn just under $285k in compounded interest

That 100k invested safely vs paying off the mortgage nets you $237k more than what you will pay in interest to just ride out the loan...Exponentially more if you invest your planned extra payments along the way and/or manage a higher rate of return...just keeping the example simple.
Just plug your numbers into any amortization and compound interest calculators...thats the great thing about numbers...they don't lie.
Folks that are caught up in 'owning' their home are getting too emotional about it IMHO.
The reality is you never really own your home unless property taxes go away, your just renting it from the state and if you factor maintenance and repair costs, the appreciated value over 30 years is often deminished significantly from in investment standpoint. It's sad, but it's true.
Now folks with 6%+ mortgage interest rates...thats a whole other ball game...pay that thing off ASAP.

 

[Fowl Play]

Allot saying paying off the house is “less risky”. It’s actually not right now. Your interest rate is lower than what you can make in a savings account…

You’re putting money into an illiquid asset, when it would actually make more money in a bank. Where you can use it to pay off the very emergencies you talk about happening. Can’t eat the house…

If you’re going for truly risk adverse. Then don’t even invest it. Just pick T-bonds or high yield savings of your flavor. The benefit is actually entirely emotional. Not saying that doesn’t hold value, but the only true benefit is being able to say and feel that you are debt free.

 

[huntnful]

You are not going to convince those guys that need that peace of mind in the back of their head. It's priceless to them.
Makes 0 sense to me, but different strokes, different folks. I'd much rather owe $$ on my house at a sub 2.5% and be making over 4% on my investments with 0 risk. Knowing that i can pay my house off whenever I want to, is what makes me happy. Making money with my money, risk free.

This is exactly how I view it as well. I don’t FEEL in debt to a mortgage, because I could pay it off tomorrow. It’s not an overarching feeling of a burdensome bill.

But instead of doing that, I get to watch my money grow (or shrink in the last few weeks ) and have full access to it at any time if need.

I absolutely understand wanting to pay the house off and get it over with though. So much so, that I almost did exactly that a few years ago haha. But it would take me a long time to get $260k back into the market at the $2k monthly rate I would have saved on the mortgage.

 

[flathead#2]

Retired.
And everything is paid for.
Priceless.

 

[Dos Perros]

And the dividends of living life with no mortgage/rent payment are priceless. Work becomes exponentially less stressful when you don't need the job anymore. Lots more money in your pocket each month now do WHATEVER you want with, including invest.

Here’s another crazy take: when you don’t care about losing your job you do your job differently. I’ve begun to speak my mind and take riskier positions. And wouldn’t you know it people like and respect me more and I’ve been asked to apply for higher up positions. One could leverage that into larger paychecks, enough to cover the yield delta y’all are debating.

 

[Pickettpuncher]

So if you are making 24 half payments, or 12 full payments, how does that result in one extra monthly payment a year?

You would have to be paying half your mortgage payment every 2 weeks for this to work. 52/2=26 half payments or 13 full payments.

Because paying that way, you make 26 half payments, or 13 full payments. The extra full payment is straight principle.

 

[ODB]

Here’s another crazy take: when you don’t care about losing your job you do your job differently. I’ve begun to speak my mind and take riskier positions. And wouldn’t you know it people like and respect me more and I’ve been asked to apply for higher up positions. One could leverage that into larger paychecks, enough to cover the yield delta y’all are debating.

Absolutely true. These are the intangibles that don't make it to spreadsheets. There have been plenty of comments about people's 'situations' etc. and how one lives their life is as important as anything. We can;t assume that 'all else is equal' when we are looking at the mortgage/investing picture.

This is a great thread and one I am watching with interest as we are only about 75K in liquid assets from equaling our pay-off. Our loan is at 3.3%, CDs at 4.85% and High Yield savings at 3.5%. Those numbers might be a slam dunk answer for some, but a zero (or close to it) mortgage engages the intangible elements that do count for something.