Mortgage Principal Pay Down Vs. Invest 50k (New Investor)

[eddie_v]

Hi Everyone,

I am very new to investing, and have approximately 50k in additional savings (in addition to my 6 Month EF) that I am interested in investing for the long term.

My primary dilemma is figuring out if I should pay down the principal of my mortgage (350k remaining in Principal) over 28 more years... Versus investing in a long term (15-20+ years) in something as stable as possible focusing on compounding interest.

I have a pension in place through my state job, and have not yet made any outside retirement investments.

I have no student or CC debt, no car payments, just the mortgage, and general expenses.

So bottom line - with the 6 month EF in cash in place, and the additional 50k open for use, would you opt to pay down the principal or invest elsewhere?

The way the numbers (appear) to work out from the calculations I have (tried) to make, tell me that if I keep paying my mortgage for the next 28 years, my 380k mortgage will have cost me approximately 675k total over those 30 years. so 300k in interest give or take (mortgage is 3.75% interest).

If I take the same 50k, and invest it into something earning 3-5% with compounding it shows me that I stand to earn more in interest (in theory) than the interest I would be saving by taking the same 50k and applying it directly to principal thus reducing the principal to 310k on my mortgage.

Sorry if I am ranting on lol, but this is the main issue I am facing.

[kork13]

This is a very common question, and one that I recently had to figure out for myself. So you're in good company!

Personally, I decided to do both (to an extent). I bumped up my normal monthly mortgage payment a bit, then I'm sending the rest of my excess funds to investments. As stated, you typically will earn more with the investments over time, especially over a long-term period (15+ years). The trick is investing the money in the right way so that you're comfortable with what you're doing. Perhaps you need to do 70% in stocks & keep 30% in bonds to help moderate your money's ups & downs. Or if you're comfortable with anything, you could possibly do 100% stocks, or 90/10. Or maybe you're very hesitant about stocks, and you need more stability -- a 50/50 mix might make sense.

Really, just do what you're comfortable with. If having the home paid off sooner helps you sleep at night, do that. If the mortgage doesn't bother you & you're comfortable with investments, then go that route.

Final note: I understand you're earning toward a state pension.... But I would strongly recommend that you also save at least 10-20% of your income in retirement-focused accounts. That might be in a 401k/403b/etc, or it could be an IRA (Traditional or Roth). Whatever makes sense in your situation, you shouldn't let yourself rely solely on a pension & SS.

[Jluke]

not enough info.

age?
- Income?
- Expenses?
- is there a 401k or other retirement savings through work?
- do you qualify for a Roth?

it's not an all or nothing thing for what to do with the 50k.

If you have 28 years on your mortgage, have you thought about refinancing to a 15 or 20-year mortgage? That alone should save money on interest and shorten the loan term.

I don't know what 6 months EF equates to dollar wise, but you may want to give yourself more EF. And that could be accomplished through either a Roth or a taxable investing account (think of the EF in tiers - cash, investments).

If you qualify for a Roth and/or another retirement plan through work, you should be focused on putting money there before the mortgage.

I'll stop there; hoping for more details.

[disneysteve]

If I take the same 50k, and invest it into something earning 3-5%

Your long term investments should do better than 3-5%.

Also factor in that the mortgage interest is tax deductible, so your true rate is not 3.75%. It is 3.75 x (1-your tax rate). If you are in the 25% bracket, that means 3.75 x (1 - 0.25) = 2.8125%. You should certainly be able to outperform 2.8% with a good investment portfolio, even something simple like a target date retirement fund.

I would certainly be investing most or all of that money. If you want to make a little extra payment on the mortgage, that's fine. Maybe round up the payment to the next $100 or so.

If you have an employer plan with a match, use that to get the full match. If not, fund a Roth IRA each year for $5,500 and then invest the rest in a taxable account.

[eddie_v]

@ JLuke - Answers below in bold

not enough info.

age?
32 Years Old

- Income?
Approximately 200k/year

- Expenses?
6k/month

- is there a 401k or other retirement savings through work?
I have to look into this, I believe it is available


- do you qualify for a Roth?
Yes I was told that I do (as of 1 year ago)

it's not an all or nothing thing for what to do with the 50k.

If you have 28 years on your mortgage, have you thought about refinancing to a 15 or 20-year mortgage? That alone should save money on interest and shorten the loan term.

I always liked the idea of having the flexibility of using the full 30 years (if needed) but always felt I can pay it quicker to get it to 20 years or so with approx 500/m in additional principal payments



I don't know what 6 months EF equates to dollar wise, but you may want to give yourself more EF. And that could be accomplished through either a Roth or a taxable investing account (think of the EF in tiers - cash, investments).

We have about 40k available liquid at any time needed for our 6 month EF

We have three children now, one is 3 1/2, and twins - 2months




If you qualify for a Roth and/or another retirement plan through work, you should be focused on putting money there before the mortgage.

I'll stop there; hoping for more details.


@DisneySteve - Thank you for the insights! I never looked at it this way, but now that I see it in this light, the investment with a target date of (say) 20 years (college for the kids) etc would be ideal.

Is there a fairly liquid investment vehicle for me to use for say 30k out of the 50k that can double as an investment and an extension of my EF?

[disneysteve]

- Income?
[B]Approximately 200k/year

- do you qualify for a Roth?
Yes I was told that I do (as of 1 year ago)


@DisneySteve - Thank you for the insights! I never looked at it this way, but now that I see it in this light, the investment with a target date of (say) 20 years (college for the kids) etc would be ideal.

Is there a fairly liquid investment vehicle for me to use for say 30k out of the 50k that can double as an investment and an extension of my EF?

If you earn 200K, you may not qualify for the Roth, but it depends on your modified adjusted gross income. The contribution starts phasing out at 186K of MAGI.

When I suggested a target fund, I meant for your retirement, not for your kids' college. There are similar funds in 529 plans that are age-adjusted, though. We used one for our daughter's 529.

Why do you feel you need such a large EF? You already have 6 months worth. Why do you need another 30K which is another 5 months worth?

Do both you and your wife have adequate term life insurance that is not through your jobs? Rule of thumb is 8-10 times income.

You are young and have a couple of decades, at least, for this money to grow. It should be invested in primarily equities for long term growth.

And assuming you want to contribute to your kids' education, you should be saving separately for them. 529 plans are the most common way to do that though not everyone goes that route.

[Jluke]

open a taxable account at fidelity, vanguard, schwab or other firm of your choice.

Invest in a total stock market fund like FSTVX at fidelity (ITOT is the ETF equivalent) or VTSAX at vanguard (VTI is the ETF equivalent). There will not be any fees to buy/sell, low expense ratio, and they are fairly tax efficient.

Look closely at your AGI like disneysteve said and contribute to Roth if you can - may want to wait for 2017 tax return to be finalized before contributing. You have until April 15, 2018 to contribute to your 2017 Roth. Also, consider his suggestion on a 529.

The $500/month plan on the mortgage is a good idea. knocks off 10 years and about 100k in interest.

[eddie_v]

Thank you very much guys I appreciate the advice.

As for the EF, I guess there really is no reason to have more than 6 months worth so that money would be better invested elsewhere.

The other factor I meant to bring up was the equity we have in our home, does this factor into any of these decisions? Or is this equity always best left untouched?

We have (approximately) 600k in equity built into the home as of this moment, and this is where (in terms of our down payment and renovations) much of my savings went in the past 2 years.

So the questions I asked originally in this thread were meant to be a new savings/investment starting point for us.

In addition to this, I neglected to mention that approximately 120k of that 200k incomes comes from a business I run, and I am also looking for constructive ways to reduce my tax liabilities from the income of this business while still building wealth... my wife is an employee of the business as well.. if I were to open up those retirement accounts could I theoretically stow away a considerable amount of money (pre tax) into these retirement accounts for the two of us through the business?

Thanks again guys, and sorry for the million questions :-)

[kork13]

Thank you very much guys I appreciate the advice.

As for the EF, I guess there really is no reason to have more than 6 months worth so that money would be better invested elsewhere.

I agree. In fact, some choose to invest even a portion of their EF in higher-earning CDs or bonds rather than a savings account. Valid either way, just depends on what you're comfortable doing.

The other factor I meant to bring up was the equity we have in our home, does this factor into any of these decisions? Or is this equity always best left untouched?

We have (approximately) 600k in equity built into the home as of this moment, and this is where (in terms of our down payment and renovations) much of my savings went in the past 2 years.

Unless you plan on selling your home, you should not plan to tap any of your equity. You've gotta live somewhere, and you can only use that equity by either selling or re-mortgaging (HELOC) your home. You wouldn't want to do that in most cases. There are some arguments for selectively tapping home equity for very specific reasons, but I'll keep it simple.

In addition to this, I neglected to mention that approximately 120k of that 200k incomes comes from a business I run, and I am also looking for constructive ways to reduce my tax liabilities from the income of this business while still building wealth... my wife is an employee of the business as well.. if I were to open up those retirement accounts could I theoretically stow away a considerable amount of money (pre tax) into these retirement accounts for the two of us through the business?

Yes, setting up a retirement plan would be an excellent way to reduce your tax liability! With a 401k-style plan, you & your wife can make pre-tax contributions, which directly reduce your tax liability. Plus, as the business owner, you can also set up the retirement plan to add a matching feature, which will also reduce the business' tax liability. I'm not very familiar with them, but depending on your situation, a SEP IRA might be another good option instead of setting up a 401k plan.

[eddie_v]

Thanks Kork!

This is great advice!

So basically I set up an employee 401k plan, and I can set a side a maximum of (do we know how much) per employee? My wife is an employee, but is it OK for me to include myself as an owner to this contribution as well?

In addition to this, do we know of any other ways to invest to reduce tax liability?

In other words let's say I have (after this 401k contribution) 100k in taxable income from this business, can you offer any other ideas in how to best reduce the liability?

Open to all ideas.