Pay off 30 yr mortgage faster or invest instead?

While I haven't crunched the numbers, if financial freedom is important to you, why don't you make enough payments to pay off the loan by the time you retire and invest the balance. You could invest it somewhere else like you friend suggested but what kind of return will you get? Just my opinion and like I said I didn't crunch the numbers but wouldn't want to be paying a mortgage once I retired unless I was planning to pay off the entire balance then.

the monthly mortgage of today will seem minor in 15 years and should be covered by rental value anyway.
I have another apartment and between that and the rental value of this I don't have a drain...even when i stop working.

so my question is what's a better financial decision?

There's no perfect answer, and the metrics/results are different..
Prepaying shortens the mortgage, guarantees return of 3.75% and will free up cash flow one the mortgage is gone(nothing to sneeze at). The downside is that 3.75% mortgage has a very real chance of being a negative interest rate in real terms if you consider inflation. But before you jump at investing in stocks/bonds just realize the risk adjusted return in bonds is terrible and stocks are not cheap at this juncture having risen substantially since 2008. Parentheticlaly GMO CAPITAL posts a respected and updated commentary on what they view future returns on equities are likely to be with large cap stocks expected to return -0.6% annualized over the next seven years,small caps -1.7% and a category they refer to as U.S. high quality 4.1%. So unless your planning on venturing into some of the more speculative and promising areas such as small cap intl, emerging market intl, or managed timber you might just decide that prepaying is the least bad option as it provides a guaranteed return and frees up your cash flow.

Has making mortgage payments come back into vogue?

Simplifying Riversider's post, it's your expected return on invested capital (scheduled and unscheduled principal) vs the effective cost of your mortgage (rate - tax advantages you may or may not be giving credit too) while considering your comfort level of debt.

NYC4me, Completely depends on your comfort and expected return from your other investments. Also, I would have thought that you would get 15y mortgage which costs less if you really wanted to pay it down. Why not invest some in emerging markets (EEM) as they are pretty beaten up relative to spx? Assume you have some us equity exposure already. Just do not forget to sell when the world economy has been doing well for a couple of years.

OP: agree with reco from your friend. Why not keep the virtually zero interest rate loan? Nobody has a crytal ball as to where to put the money to exceed 3.75% return but I'd prefer to be more liquid. You could automatically make deposits to a new account that are psychologically ear-marked for the mortgage but you are still liquid.

Paying off the mortgage sounds all well and good, until you lose your job indefinitely and wish you'd hung onto that cash.

Hint: If you pay the bank back early, it won't give you the money back if and when you really need it!

From an investment perspective you presumably have full tax deductibility on any interest payments so your effective interest rate may be closer to 2% after this. If you can feel comfortable that you can yield greater than this on your investments over a 15 year horizon then I would invest instead. As others have stated you also have the flexibility on what to do with this invested capital in 15 years too.

>Paying off the mortgage sounds all well and good, until you lose your job indefinitely and wish you'd hung onto that cash.

If this person can't afford to weather a period of unemployment with no mortgage and only the monthly maintenance to pay, then it sounds like this person was in over his head to begin with - bought too expensive an apartment with too much mortgage for the income and security presently in his or her career. The good news is this person can sell the apartment and receive all of the proceeds without having to pay off the bank anymore, and then move to Florida.

Those ginormous fees you paid upfront?

"you presumably have full tax deductibility on any interest payments so your effective interest rate may be closer to 2% after this" == Key point. It is a no-brainer from my perspective to pay off principal if you exceed the deductibility cap. Below that, there is more room for debate. But if you are "rich," you should assume that the mortgage will not be deductible for very long as congress searches for further ways to screw people who actually work for a living.

After-tax, it's more like 2.5% at best given income bracket.

A big part of the equation is whether you are sitting on a lot of equity. If so, then the loan is effectively risk-free from your perspective. You are paying 3.75% pre-tax for a risk-free loan with a duration of 30 years, maybe less. A 30-yr US treasury pays 2.85% pre-tax.

So in some sense, paying off the equalish-risk but higher-interest-for-possibly-shorter-duration mortgage would be better.

If you hold little equity, or else need the liquidity NYCMatt describes, then it's a different story.

A family member of mine did not heed Matt's advice (which was mine to this person also, BTW) and pre-paid several years worth of mortgage payments...then later ran into serious financial trouble but could NOT get a home equity lone, because the house was down in value, etc. Bottom line - he would have been MUCH better off saving and investing that money, which would have earned at least as much as the interest payments were costing, if not more.

What a surprise Jason's family couldn't get a lone.

But more to the point. Jason's relative had serious financial trouble but he would have been better off putting money into additional investments???

"What a surprise Jason's family couldn't get a lone."

Excellent spelling. But I am sure you know that when the housing market tanked, millions of Americans found that there homes were underwater even as the banks were tightening their lending standards. So plenty of people with perfect credit scores could not get home equity loans. This is news to you somehow?

"But more to the point. Jason's relative had serious financial trouble but he would have been better off putting money into additional investments???"

Yes, because his mortgage payments were $2500 per month. He was paying double payments for two years. That means he would have had $60k saved up for a rainy day. That's basic, Sue Orman logic.

look....hfscomm1 is in the press.

http://nymag.com/news/intelligencer/trolling-2013-4/

>Excellent spelling.

Check your post first.

>Yes, because his mortgage payments were $2500 per month. He was paying double payments for two years. That means he would have had $60k saved up for a rainy day. That's basic, Sue Orman logic.

So with that $60k, your irresponsible relative should have "invest[ed] that money"?

aren't you excited about the article about you?

Columbia County tourism web site: http://www.columbiacounty.com.

so...you're not excited?

old news?

"So with that $60k, your irresponsible relative should have "invest[ed] that money"?"

In USTs, yes, he would have been unambiguously better off and not had to borrow a far smaller sum from me years later. And even CDs would have been better. A savings account. Cash under the mattress. Pre-paying super low interest debt and NOT having a rainy day fund is not a sound thing to do.

Savings, CDs , mattress cash are not inveaents.
But you are not aloan, you have NYCMatt and Suze.

not investments.

Jason, let me add one dissenting data point: I paid off my home renovation loan far in advance, depleting my savings, and was happy to have the peace of mind. I had borrowed about $27,000 at 3.875%, to be repaid over three years, with just about zero in the bank to start. A year and a half later, I had paid back about $14,000 and had $14,000 to go. I was wasting about $70 per month in interest payments, and had already given away $1000 so far. Why keep throwing that money away?

There was no possiblity of earning a return that high (or even one-tenth that high) on any investment for me, so I paid it back and slept soundly every day for a long time indeed.

If you have confidence in your job and in your income stream, I say get yourself out of debt. Particularly if the interest rate on your debt is variable, as mine was.

"Paying off the mortgage sounds all well and good, until you lose your job indefinitely and wish you'd hung onto that cash."

One-percenter problems. We regular people who don't get paid exorbitant salaries but are capable and intelligent know that we can find jobs paying what we make now very easily.

How long would you expect your job search to be if you make $200k or more as an executive? Years?

How long is your typical job search if you want to earn $8 per hour flipping burgers? A day or two. Typical middle-class people are closer to this, in both money and in job search duration.

If you're more confident in your ability to earn money in the future than you are in your ability to make your current savings grow (or even to preserve its value), and you don't have kids and their related expenses, I say bet on your future self and get out of debt.

Jason's relative is no one percenter.

Always have a rainy day fund, that issue should be taken off the table. The real question is what to do with additional funds after the rainy day fund. You can guarantee a return around 2% after tax return by prepaying mortgage. There is more risk in putting your money into the market, but you should be able to do better than that over the long-run. I would invest the money, and once you get enough to pay off the mortgage, make the decision then whether to pay it all of at once if you are very debt averse, which I tend to be.

However, if you have a variable loan (I happen to have a 10 year ARM right now - which I only recommend if you are fairly sure you can pay it off before the fixed rate turns variable but future inflation is all but guaranteed), then the equation can change in a hurry and you need to constantly analyze it with changing rates

NYC_4me, I would invest the money in other assets rather than prepaying the mortgage. Debt leverage increases returns in rising markets, and conventional wisdom would tell you that both the stock market and real estate market will appreciate over the next 30 years.

You can borrow money cheaply against your house (i.e. your mortgage), but most people can't borrow money against a traditional investment portfolio, especially cheaply for a sustained period of time.

You have a 30 year mortgage at a very low rate, and keeping as much of the balance outstanding as possible maximizes your leverage for your entire investment portfolio and therefore maximizes your return over the next 30 years.

"Always have a rainy day fund, that issue should be taken off the table."

And yet the majority of homeowners in America do not in fact have the 6-12 months of after-tax earnings saved up and liquid (which Sue Orman viewers know well.) I too think this should be obvious, but apparently one greyed out person on this board can't get that through his head. Neither, I'm afraid, could my relative.

Jason has a gray relative.

"I too think this should be obvious, but apparently one greyed out person on this board can't get that through his head. Neither, I'm afraid, could my relative."

It wasn't me you grayed, was it!? I never ignore anyone on this board no matter how much my opinions diverge from theirs.

Incidentally, while in my earlier post I claimed to have depleted my savings, I actually keep $10,000 in a CD that I never think about and don't include when calculating my net worth. I treat it as "spent money" and it's a true emergency fund. Since I have no kids, own my home, and have no debt, that $10k could last me for well over a year, easily.

"that $10k could last me for well over a year, easily."

where do u live and how do u do that

Not you triple zero. But anyway that was matt's point that I was echoing, that you need to have money set aside and pre-paying debt you can currently afford to service should not come at the expense of having an adequate amount of savings.

But Also what 1234 said.

Sounds like NycMatt and Jason's gray relative would be better as renters.

if you are not sure about retiring in NYC, i wouldn't put an extra $ on the house and try to maximize liquid investable assets instead. that is what gives you freedom, not a 1st residence.

Thanks everyone...sounds like the trend is towards not paying additional payments against principal...though insecurity about where to invest.
Got a rainy day fund as well as a profession that's high in demand. But you never know.
very helpful...thanks much

:-)

"where do u live and how do u do that"

In an apartment in a city where "used" property is woefully undervalued. Common fees are $250 per month, which is low enough, but property taxes are $60 per *quarter*. That's literally pennies a day. (Specifically, the assessed value of my apartment is something like $12,000, and this is multiplied by 2.1% per year to arrive at the property tax assessment.)

Company provides train fare, and the future-Mrs. is paying off her own debts so neither of us have expensive tastes.

This happy situation won't last, since I want a child some day, but for now, I'm not complaining!

I always find that real estate brokers and discussion boards are the ones who know best about investments and in general what to do with my life. I also find that having my cat paint my house, my broker wash my car and my doctor mow my lawn is a great strategy.

@triple_zero

that's awesome, manhattan is killing me. i can't get my expenses low enough to survive here in the long run! i need to find out where u are and get out of here, at $12k per yr, i could retire and then i wouldn't even have to mow guywithcat's lawn

30 years to pay the mortgage is crazy to begin with, but since society tells people to stretch financially it seems to be normal. Pay your bills you will feel more secure not less. No one got into trouble in the crisis because their house was fully paid.