Pay off mortgage or continue to invest?

S

scubasteve

Active member
My interest rate is currently at 3.5% for a 30 year loan.  I'm fortunate that my company options have appreciated to the point where I can pay off my house and have a little left over for a rainy day.  Would I be better off paying off my mortgage now or continue to invest and let inflation lower my payments over time. I know I can probably achieve  7% return on average by just buying index ETFs, but there's no better feeling than being debt free.  There's also some tax concerns since I would have to sell a lot of the stocks at once and will also have no interest  to deduct in the future... any thoughts on this?
 
scubasteve said:
My interest rate is currently at 3.5% for a 30 year loan.  I'm fortunate that my company options have appreciated to the point where I can pay off my house and have a little left over for a rainy day.  Would I be better off paying off my mortgage now or continue to invest and let inflation lower my payments over time. I know I can probably achieve  7% return on average by just buying index ETFs, but there's no better feeling than being debt free.  There's also some tax concerns since I would have to sell a lot of the stocks at once and will also have no interest  to deduct in the future... any thoughts on this?
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1)  How many more years left on the loan?

2)  Do you intend to stay there for a significant period of time?

Just at the face of it, I would cash out the options over time and have a conservative investment strategy in which you have a significant portion of the money for rainy day/house payments in case something bad happened.
 
Like IC, at face value, don't pay off the house since interest rate is so low and you can deduct it.

Debt free is nice but you never know when you are going to need cash.
 
Your got a very good rate for your mortgage, might not see such a low rate again.  I would keep the mortgage too.
 
lnc said:
Your got a very good rate for your mortgage, might not see such a low rate again.  I would keep the mortgage too.
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Yeah I'd keep that mortgage.  Although it must be nice to have no Mortgage. I can only imagine right now. 
 
Let's look at it differently:

Scenario A
You can invest $500,000 in the stock market.

Scenario B
Or you can use leverage and borrow another $500,000 at 2.5% interest and invest $1,000,000 in the stock market.

Scenario 1 - Stock market does well
It goes up 7% per year for the next 5 years.
Scenario A - you make $200,000
Scenario B - you make $400,000 minus $66,000 in interest for a net of $334,000

Scenario 2 - Another 2008 happens
Stock market falls 50%
Scenario A - you lose $250,000 and are left with $250,000
Scenario B - you lose $500,000 and are left with nothing

You are making a similar choice here. The relevant questions are:

How likely is another 2008-09 crash to happen?
Are you willing to take the risk?
 
Definitely keep the mortgage with that interest rate.  I would interest the funds...stock market, a rental property, corp bonds, savings, and/or all of these. 
 
Or if you think your company will outperform all the other investment choices you can just sit on the options and exercise later. If you put your money in the market can't you stomach/withstand a big downturn?  Paying off the mortgage guarantees you something. But that's less risky and thus lower returns. If you need cash you could always get a heloc/mortgage. Long term you'll likely be better off in the stock market. Either way a nice problem to have. Good luck.

Ps - at one point one of my former bosses had options worth over 10m, then they had a mishap with one of their products and virtually overnight his options were worthless.
 
I'll also add that 3.5% isn't as low of a rate as you might think. Let's say you want to invest your money risk-free and earn 3.5%. You can't right now. You could buy 30 year AAA bonds that pay around that amount of interest, but they are a lot riskier than just paying off your mortgage due to interest rate risk.

By paying off your mortgage you are guaranteeing yourself a 3.5% return on your cash. If interest rates ever do go up or there is a great buying opportunity in the stock market you could again take out a mortgage and invest.
 
paperboyNC said:
I'll also add that 3.5% isn't as low of a rate as you might think. Let's say you want to invest your money risk-free and earn 3.5%. You can't right now. You could buy 30 year AAA bonds that pay around that amount of interest, but they are a lot riskier than just paying off your mortgage due to interest rate risk.

By paying off your mortgage you are guaranteeing yourself a 3.5% return on your cash. If interest rates ever do go up or there is a great buying opportunity in the stock market you could again take out a mortgage and invest.
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minus tax deductions and present use value of the money.  Having money now is worth a lot more than having money spread out over 30 years.
 
thatOSguy said:
i1 said:
whatever you decide, i'd just suggest selling off a good portion of the company stock sooner rather than later so you don't have both your income and a very large part of your savings tied up in one company.
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Provided you don't raise any eyebrows in the process....
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Don't worry about raising eyebrows. Are the eyebrow raisers going to make you whole if your stock takes a dive?  Take care if your family first and foremost.
 
Irvinecommuter said:
paperboyNC said:
I'll also add that 3.5% isn't as low of a rate as you might think. Let's say you want to invest your money risk-free and earn 3.5%. You can't right now. You could buy 30 year AAA bonds that pay around that amount of interest, but they are a lot riskier than just paying off your mortgage due to interest rate risk.

By paying off your mortgage you are guaranteeing yourself a 3.5% return on your cash. If interest rates ever do go up or there is a great buying opportunity in the stock market you could again take out a mortgage and invest.
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minus tax deductions and present use value of the money.  Having money now is worth a lot more than having money spread out over 30 years.
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In my example (buying a 30 year bond that pays 3.5%) you actually have almost equal tax treatment (you get a tax deduction on the 3.5% you pay and pay taxes on the 3.5% you earn provided you pay enough in state taxes to itemize deductions).

If you buy a 30 year bond you don't have the money now either which is also the same as paying off your mortgage.

 
paperboyNC said:
Irvinecommuter said:
paperboyNC said:
I'll also add that 3.5% isn't as low of a rate as you might think. Let's say you want to invest your money risk-free and earn 3.5%. You can't right now. You could buy 30 year AAA bonds that pay around that amount of interest, but they are a lot riskier than just paying off your mortgage due to interest rate risk.

By paying off your mortgage you are guaranteeing yourself a 3.5% return on your cash. If interest rates ever do go up or there is a great buying opportunity in the stock market you could again take out a mortgage and invest.
Click to expand...

minus tax deductions and present use value of the money.  Having money now is worth a lot more than having money spread out over 30 years.
Click to expand...

In my example (buying a 30 year bond that pays 3.5%) you actually have almost equal tax treatment (you get a tax deduction on the 3.5% you pay and pay taxes on the 3.5% you earn provided you pay enough in state taxes to itemize deductions).

If you buy a 30 year bond you don't have the money now either which is also the same as paying off your mortgage.
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But why would you buy a 30 year bond?  That's basically hedging against inflation.  If you pay off the house and then borrow later...you are likely going to have a higher interest rate (5-7% for a regular mortgage and 7-10% for a HELOC). 

If you keep your mortgage, you get the tax deduction and have the lender holding the carrying costs.  Meanwhile you can invest in a mixed portfolio that is likely to yield above 5%.  Of course there is risk but just about every investment has risk.
 
Irvinecommuter said:
If you keep your mortgage, you get the tax deduction and have the lender holding the carrying costs.  Meanwhile you can invest in a mixed portfolio that is likely to yield above 5%.  Of course there is risk but just about every investment has risk.
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I'm purposely playing the devil's advocate here.

Using cash to pay off debt is the most risk-free investment you can make. I recently read a happiness study that said paying off your mortgage was one of the things that makes families significantly happier.

If you borrow at 3.5% and get 5% from your investments, you are taking a lot of risk for not a lot of return. And always remember - don't subtract the tax deduction on your mortgage interest unless you also subtract the tax owed on your investment.

Here's another question: If you were a financial advisor and you had clients in the following situations, would you give them the same advice?

Client #1: I am one year away from paying off my 15yr mortgage and I'm 40 years old.

TI: Borrow 80% against your home and invest it in stocks!

Client #2: I bought a house for cash last year.

TI: Borrow 80% against your home and invest it in stocks!

Client #3: I am 55% LTV.

TI: Borrow 80% against your home and invest it in stocks!

Client #4: I inherited a home debt-free.

TI: Borrow 80% against your home and invest it in stocks!

 
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