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Advise on early Mortgage Payoff vs Investing

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guitarguy0082
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Advise on early Mortgage Payoff vs Investing  Reply with quote  

Hello, I am new to this site and welcome experienced advise.. Without going into a large amount of detail I am trying to decide where my money would best go. I am 34, I am single no kids, no CC debt and I owe about $43,000 on my mortgage. I have the money in my savings account at a credit union earning a horrible interest rate and Im trying to decide if it would be best to payoff my mortgage now or put the money is some high yield savings or CD I have been reading about. The home loan is 2.99 percent which is costing me over $100 a month in interest on the 15 loan term (12 years left) so I'm torn between keeping the 'liquid' on hand or investing it at around 1% on an online savings that I could still access the cash if I needed it for some reason. I have no other debt besides a car payment at 1.99% which I will keep vs paying off. If I paid off the loan I would still have over $10,000 left in the bank. I already have an IRA building up mostly in stocks that is being managed. Im just trying to figure out the best way to make my money work for me. Thanks for any input.
Post Tue Dec 06, 2016 3:47 am
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ken-do-nim
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So you've got about $53,000. First off, congratulations! Second, you have an IRA, so assuming there's enough in there, retirement looks covered, also congrats!

The first $15000 or so of that $53000 should be your emergency fund. That leaves you with $38,000. Of course you could invest it in the market and make a higher percentage than either of your other loans are costing you, but before you do that, make sure it is money you don't need for at least 5 years. If you are planning on a home addition, then keep it saved for that.
Post Tue Dec 06, 2016 3:07 pm
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ken-do-nim
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Sorry, I should have stated that in general you need to come up with a Life Goal. Then match your finances to meet that Life Goal. For me, it is early retirement, so I take my excess and invest it in the market.
Post Tue Dec 06, 2016 3:08 pm
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oldguy
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quote:
decide if it would be best to payoff my mortgage now or put the money is some high yield savings or CD I have been reading about. The home loan is 2.99 percent


You are at a great decision point - 'save' or 'invest'. The Law of Finance - "risk and return are directly proportional'. You need some risk to build wealth and to outpace inflation, right now your 1% savings is losing purchasing power, the prices of goods are inflating MORE than the 1% that you are getting.

There is no such thing as 'high yield' savings/CDs (except in the marketers mind). A no-risk account is a low return account, by definition.

Your $43,000, invested at 11%/yr ( the longterm US Market average) would be about $990,000 in 30 yrs. So it would be worthwhile to retain the use of your $43,000 rather than spending it to prepay a loan. (Your 15 yr loan at 3% will cost you about $54,000 - I would pay the $54,000 and use the $43,000 to grow the $990,000.).

BTW, I had several rental houses over a 40 year period, whenever one of the houses built up equity, I refinanced it , took out the equity, and invested it at 11%. It is a great wealth builder. (Same with cars, even tho I'm wealthy, I never pay cash for a car, I finance the whole thing and use a 60 month loan.)
Post Tue Dec 06, 2016 3:30 pm
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ken-do-nim
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quote:
Originally posted by oldguy


You are at a great decision point - 'save' or 'invest'. The Law of Finance - "risk and return are directly proportional'. You need some risk to build wealth and to outpace inflation, right now your 1% savings is losing purchasing power, the prices of goods are inflating MORE than the 1% that you are getting.

There is no such thing as 'high yield' savings/CDs (except in the marketers mind). A no-risk account is a low return account, by definition.

Your $43,000, invested at 11%/yr ( the longterm US Market average) would be about $990,000 in 30 yrs. So it would be worthwhile to retain the use of your $43,000 rather than spending it to prepay a loan. (Your 15 yr loan at 3% will cost you about $54,000 - I would pay the $54,000 and use the $43,000 to grow the $990,000.).

BTW, I had several rental houses over a 40 year period, whenever one of the houses built up equity, I refinanced it , took out the equity, and invested it at 11%. It is a great wealth builder. (Same with cars, even tho I'm wealthy, I never pay cash for a car, I finance the whole thing and use a 60 month loan.)


oldguy - I've noticed that you never explicitly mention holding any money back as an emergency fund when you give advice. Are you just simplifying things, or do you actually believe people should invest that money, and pull it out of the market if they need to?
Post Fri Dec 09, 2016 1:53 pm
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oldguy
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or do you actually believe people should invest that money, and pull it out of the market if they need to?


That's what I do. I have a large SP500 Index Fund, the money is available in one day. For little emergencies - washer/dryer, new AC, etc - we use a credit card, then decide the following month whether or not we need to sell some stock. When rates are low, I borrow to meet our shortterm needs, and avoid selling stock. Eg, I never pay cash for a car, I finance the entire cost over 60 months and set up an automatic payment.= - and leave our own $35k or $40k invested (where I expect it to nearly double in that 5-yr period).

In general, I don't keep large blocks of 'dead' money sitting idle in EFs. In fact, IMO, the 'super safe' financial planners have partly caused the poor financial status of Baby Boomers. Given the great job markets of the 1980s/90s, many more workers should have been multi-millionaires. Instead, mediocre, one size fits all, financial planning gave mediocre results.
Post Fri Dec 09, 2016 4:34 pm
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ken-do-nim
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I'll have to give that some thought then. My emergency fund is $15000, sitting in a money market fund.
Post Fri Dec 09, 2016 7:35 pm
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oldguy
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quote:
My emergency fund is $15000, sitting in a money market fund.


Yeah, in 30 yrs the $15,000 in the MM will still be worth $15,000. Or, $15,000 placed at the longterm market average will be $345,000.
The first is a mathematical certainty - the second is a statistical probable outcome. Ie, one is safe, the second carries risk.
Post Fri Dec 09, 2016 8:55 pm
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ken-do-nim
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quote:
Originally posted by oldguy
quote:
My emergency fund is $15000, sitting in a money market fund.


Yeah, in 30 yrs the $15,000 in the MM will still be worth $15,000. Or, $15,000 placed at the longterm market average will be $345,000.
The first is a mathematical certainty - the second is a statistical probable outcome. Ie, one is safe, the second carries risk.


I put $10,000 of that $15,000 into SPY. Feels good!
Post Wed Dec 14, 2016 9:26 pm
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ken-do-nim
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quote:
Originally posted by ken-do-nim
quote:
Originally posted by oldguy
quote:
My emergency fund is $15000, sitting in a money market fund.


Yeah, in 30 yrs the $15,000 in the MM will still be worth $15,000. Or, $15,000 placed at the longterm market average will be $345,000.
The first is a mathematical certainty - the second is a statistical probable outcome. Ie, one is safe, the second carries risk.


I put $10,000 of that $15,000 into SPY. Feels good!


Update: I've made $734 on that $10k investment so far! Very Happy
Post Wed Mar 01, 2017 5:04 pm
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christcorp
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There are definitely wrong ways to manage money, but there are always more than one right way to manage money. From what I've read in your posts, if you paid off the house, you'd have $10,000 left in savings, plus and $15,000 in an emergency fund. Assuming this is correct, this is what I'd do.

1. Pay off the house. It's only a 3% loan, but that is 3% you're losing GUARANTEED.
2. Of the mortgage you WERE paying, hold back the necessary amount for taxes and insurance each year.
3. Then, whatever the remaining of your house payment was, crank up your 401k, 457b, or whatever work investment you have available. This will also lower your taxable income.
4. If you don't have a 401k or similar, then put the remaining house payment money in an investment fund. Max out your ira's first if you haven't already.
5. Keep your $15,000 emergency fund for long term emergency like if unemployed, and the $10,000 for short term large expenses such as a major car repair, water heater, roof repair, etc.

Yes, there are funds you can invest in and have cash available quickly if needed. I personally, just me, don't like this method when needing cash. I'm too anal. I want my long term investments to be long term. I don't like the tax headaches of tapping into investments. I like all of my funds to be allocated for specific reasons. That's just me. I have 401k types, and IRA, Roths, savings, cash, gold, silver, no mortgage, 4 cars, all debt free, no credit card balance each month, 6 figure income, collecting on one retirement currently and another in 4 years. Point being, each person is different, finances are different, and there's no one only right way to handle your finances. But there are many wrong ways to handle your finances.

There's a lot of good advice on this and other forums, and from financial advisors. But only YOU can determine what is best for you.
Post Sat Mar 11, 2017 11:47 pm
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