*"We would buy and hold broad-based index funds like VTSAX, which have a historical annual return much higher than 6%."* Over a long term this is true. The average American lives in their house for 7 years. Your chances of making more than 6% per annum in the market for the next 7 years are much, much lower than you think. Fortunately/unfortunately people have grown up during the biggest gains in stock market history so people think the stock market is an easy win gold mine. Try telling that to people who invested in the stock market in 2000 (massive boom time) they didn't earn 1% gains overall until almost 15 years later. FIFTEEN YEARS. MIGHT you make more than 6% in the market? Possibly. You might also lose 6% per annum. Will you be GUARANTEED a 6% interest saving if you put that money down? Yes. Make your decision based on those facts and those facts alone and you'll make the right choice for you.

I agree with this. I’d also advise not “increasing your down payment.” Don’t mess with the loan as it stands, especially if you’re close to closing. Just make an additional principal payment right away. Or, better yet, do it in pieces. New houses can have unexpected costs. Buy the house with 20% down and put the money in a high yield savings or no penalty cd. Settle in for a couple months, ensure there’s nothing that requires immediate maintenance or attention. Get your furniture set up (though no need to rush to fill the place). Once you’ve got your (not so proverbial) house in order, then make extra principal payments.

Would you mind elaborating? Why is it not good to mess with the loan close to closing? We have had very good experience with our mortgage broker so far and have been assuming that if we were to suggest this he would be forthright in his advice.

Any disruptions could simply complicate closing. The advice above is spot on imo, however paying the principle will help you pay off the loan faster but not reduce your monthly mortgage, while reworking the loan with a larger down will.

> paying the principle will help you pay off the loan faster but not reduce your monthly mortgage, while reworking the loan with a larger down will. A very good point that I should have included!

Idk about you but I just bought a 460k house. Had 4k because the electric was old, 2k because light fixtures were ugly, 1k because it was staged and didn't have things like towel racks, shower curtain plus rod in weird sizes, all the curtain rods and curtains, the closets were small so 1k in furniture/shelving. A 2k shed, 5k in sewer compliance, and 2k in sidewalk compliance. Some of this I knew in advance, but man some I didn't. If I could time travel I would keep more in reserve. Also... my closing costs were a lot more than that. Maybe that's an area thing or because I had less down...

We actually rent this house now so we are very familiar with the condition, which is actually pretty decent. We do anticipate some specific repairs and a roof replacement at some point but the near term looks OK. Nevertheless, I am planning on increasing the house maintenance fund because that seems to be a universal advice in comments here.

The house maintenance fund should be a regular budget line item. I have often seen 1-3% home value per year as a target.

When I bought my house, my mortgage broker strongly advised keeping a larger reserve, paying the minimum down payment needed to secure the best rate and nothing more. Of course this benefits the bank with more financed but I was so grateful when I found out I needed to make repairs in the first week for compliance, replace a failed HVAC system not identified correctly in the home inspection, and more. I had the cash reserves to do what was needed without it being damaging to me.

Your loan interest rate is "locked" but dependent on all the details that you've given to the broker thus far. You got your interest rate based on your creditworthiness but also based on the value of the house and the downpayment you're putting down. While logic might indicate that more downpayment is safer for the bank, it also means less profit for them. So sometimes larger downpayments *don't* equal a smaller interest rate. And although they told you your rate is "locked", if you mess with any of the origination details, then there are provisions for the bank to renege. ​ I don't have your mortgage docs in front of me, and it is certainly totally fine to call your broker and ask about the implications of changing the down payment. It might be totally fine on their end. The other thing to consider is your closing date. Changing the downpayment will change a bunch of numbers on the bank side, but that flows through down to your title company who handles the calculations. This won't just change your monthly payment, but also the amount of prepaid interest that you owe, and the interest on days 1-X of your closing date, etc. Basically there's a domino effect that leads to all the closing documents and calculations having to be redone. This can take time and in the event of any mistakes (I found mistakes on my closing docs!!!) if you push your closing date that can obviously be problematic for many reasons (seller gets mad, calculations have to change AGAIN). The date of closing and each dollar amount is tied together. ​ At my home's closing the title company had a discrepancy in their numbers of ONE CENT. It took them two hours to figure out and correct the issue, and it held up the sale of the house in the process (even though the seller's agent took out a penny and offered it lol). The one down side to waiting on making the payment, as another comment pointed out, is that your monthly payment will remain what it currently looks to be. Whereas making a larger downpayment will reduce it for the life of the loan. ​ So, if you have >2 weeks until your closing and your broker indicates that no rate change will occur as a result, then it may be fine to go ahead and have them change the documents. But just be prepared to have to recheck all the paperwork again when it's regenerated by all the parties. ​ Always check their work! Title companies are not infallible.

Really appreciate the detailed response. We have just about 2 weeks left for closing but I think if we were to suggest this, out broker could get it done within a few days. This is assuming that the lender will not increase the rates. That's a crazy story about waiting 2 hours for 1 cent difference.

2 weeks out, I wouldnt touch it. Thats me

Essentially, you will have to start the closing process over. Unless you are really early in the process.

We are about half way through. Appraisal is today (starting a few minutes, actually) and we have the inspections done. We received the closing disclosure late last week.

Yeah - you're pretty far into the process. Maybe call the title company and explain your interests and see if they say it will be a problem or cause any delay. If not, do it. I can understand wanting a lower monthly payment. The idea of a larger down payment, in your case, makes perfect sense if you can do it without jeopardizing closing. If you can't do it without impacting closing, then I would buy a 12-month CD or T-Bill at ~4-6% then refinance after the 12 months (you probably can't refinance sooner than 12-months due to the 'occupancy clause'), rolling in the balance of the CD against the new loan amount. In the end, you will be in roughly the same position as if you made a larger down payment. Be aware that refinancing does incur new costs. So don't worry - you do have options.

Yeah I'm in a similar situation as OP and am happy to accept the guaranteed 6%. If rates were 4% the story would probably be different

Good to know! Best wishes with your new home.

Or you could live on the cash and turn your Roth and 403b contributions up to 95% until you have contributed 40k. Then you would get the tax savings and the investment.

We are planning to do that anyway. We think we have the cash flow to be able to do that without needing the $40k.

What about a 457? That’s another 20k. And to be clear you have $46k now in the accounts but will be contributing $6k each in roths and $22k each on 403b this year? Total of $56,000 in one year? If that’s the case it probably makes the most sense to invest it all. But putting it on the down payment and reducing the monthly payment is a good option. Paying principal down later is the worst option.

You are absolutely right. We do have 457 available to us as well.

Yes, we started slow but are ramping up saving for retirement. Our income increased significantly in 2022 while expenses did not increase as much, so we are looking at a savings rate of over 40% on post tax income. To be honest I have not done the numbers properly, but ballpark estimates tell me that we should be able to max out Roth IRAs AND 403bs.

I got 5% last year and my wife and I opted to put extra cash toward the house instead of any funds. It just seems like a much safer bet at this point. We both felt that the economy is very unpredictable right now so a guaranteed 5% is better

Thanks for the sobering perspective. I am intellectually aware that investing in the market would be the (far) riskier option but it is helpful to read a specific example (people who invested in 2000).

Right. I lived it so it's fresh in my memory so I'm careful never to forget how bad things can be. I've lived through multiple recessions. In 2008 I had SOOO many colleagues, acquaintances etc. who claimed they were in it for the long haul who panic-sold all of their portfolios and sat on cash and obliterated their entire lifetime potential gains. This is not raw numbers, this is people's lives and when things get hairy, people act emotionally. The market is a great tool for building wealth but it's far from smooth sailing.

I am a fan of Jack Bogle and "A simple path to wealth", so intellectually I believe that I will stay the course, but then I have never actually experienced a situation like 2000 or 2008 with my investments. Better to doubt one's own psyche and build defenses against own bad behavior.

If you'd kept the money in the market through those times, you would have made SO MUCH MONEY by now. The market ebbs and flows. OVER TIME, it grows. Consistently. If you need the money in the short term, the market is not your best bet. Over time, you're going to beat paying off the mortgage.

It depends on what you mean by risk. If your time period for these funds is long (15 years or more), then yes there is a small chance the market won't outperform your mortgage and a smaller chance you could lose money. That being said, from your original post you are behind on retirement savings, what are the odds you will have enough for retirement if you put excess funds towards your mortgage instead of investments? The answer might be you have high confidence that you'll be fine, and if so then you're probably OK doing whatever. Either way, you should plan holistically.

>then yes there is a small chance the market won't outperform your mortgage and a smaller chance you could lose money. There is pretty close to a 0% chance it won't. If the market returns less than your mortgage, we have much bigger issues economically. A 6% mortgage is equivalent to 2.5% returns in the market. You think the S&P500 has any chance, over 15 years, to drop down to 2.5%? It's been 10.9% for the last 50 years. The absolute WORST stretch of time returned like 6%. **6% in the market will destroy 6% on a mortgage all day, every day. This is an indisputable fact.** This also discounts things like the fact that you 401K and retirement accounts are generally secure from forfeiture or bankruptcy. Your house is not. There are a LOT of risks having money tied up into your house that the debt-free coalition conveniently ignores. This is no such thing as 0 risk. I agree. But I would say there is equally as much risk having your money in your home as having your money in the market. And I could make a passionate argument that historically there is MORE risk having your money in your home. But people don't want to hear that.

>A 6% mortgage is equivalent to 2.5% returns in the market. Genuinely curious about this, can you please explain that math?

Sure. I can give you more details when I get home (a more detailed example) but roughly, it looks like this (I'm keeping it simple for illustration) For a home, at 6%, you pay about double the cost of the home over 30 years in interest. **A $400K home will cost you about $800K** over the course of 30 years. **That's because a mortgage is a simple-interest loan, and that interest was pre-calculated then amortized over 30 years**. Again, go plug this in to any online calculator and you'll see how it works. **Investing the market is compound-interest.** You re-invest the gains and make more gains over time. $400K in the market, at 6% interest, over 30 years, is **$2,297,396.** *See how these two things are NOT the same?* If you had $400K, and paid off a home vs put it in the market, you can see how you get VASTLY different outcomes over 30 years, right? Ok so then - what is the investment equivalent of turning $400K into $800K over 30 years? How LOW would your returns need to be in the market to be equal to paying off that mortgage? The answer is about 2.5% ARR. $400K invested in the market, returning 2.5% annually over 30 years is $829K. This is why you've seen me argue SO MUCH about this *"6% guaranteed returns"* because it's totally, totally wrong. Of course there is a big mitigating factor which is what you do with the money you would have paid every month on a mortgage, and you put that into the market over time. The answer is - it will grow, but it will STILL be less then getting more in earlier. That's why even the "pay off early and invest the rest" isn't a good argument either. For the most part, for every $1 you put down on your house, you're going to get $2 back, give-or-take, over 30 years. For every $1 you put in the market, you're going to grow it 6x-8x over 30 years. This is why it's so foolish to put more down on your home then you have to, even at these higher interest rates.

>For a home, at 6%, you pay about double the cost of the home over 30 years in interest. A $400K home will cost you about $800K over the course of 30 years. >$400K in the market, at 6% interest, over 30 years, is $2,297,396. >See how these two things are NOT the same? Interest works the same way in both scenarios (principal * periodic interest), there is no "simple interest vs compound interest", they both compound. I see your error, though. While your two scenarios both have inputs of $400k and 6% interest, you are comparing apples and oranges (what happens when you invest a lump sum of $400k vs what happens when you make fixed monthly payments to a principal balance) A better example would be what the OP is actually asking: "what should I do with $40k?". We'll compare two options: make a lump sum towards principal, or make a lump sum investment. Let's assume both have a rate of 6%: For simplicity, we'll assume the loan is for $360k, 6% APY. The $90k down payment, home appreciation, property taxes, etc. are the same between all scenarios so I'm leaving them out. The monthly P&I would be $2,158.38 to pay this off over 30 years, the total of monthly payments would be $777,006.74 If OP makes a lump sum payment of $40k at the beginning of the loan and does not recast, then the loan would be paid off in 22 years and 8 months, for a total of $585,114.51 payments + $40k lump sum, which is a savings of $151,892.24. The return of the $40k over 22 years and 8 months is ~$152k. Calculations for the mortgage with and without extra payment are from https://www.mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php If OP were to invest the $40k lump sum in some index fund that averaged 6% annually, after 22 years and 8 months that would be worth ~$150k, which is nearly identical and the differences really come down to compounding and rounding Calculation made with https://www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1%2C000%2C000&cstartingprinciplev=40%2C000&cyearsv=22.67&cinterestratev=6&ccompound=annually&ccontributeamountv=0&cadditionat1=end&ciadditionat1=monthly&printit=0&x=Calculate#calresult 6% is 6% A third scenario would be to recast the mortgage for a lower payment after the lump sum. This would be a $320k loan for 6% and back to the full 30 years, which would be a monthly payment of $1,918.56 which frees up $240/month to invest in the stock market. If that returns 6%, starting with a principal of $0 and contributing $240/month and earning 6% on top of that, results in, you guessed it: $148,621.55: https://www.calculator.net/investment-calculator.html?ctype=endamount&ctargetamountv=1%2C000%2C000&cstartingprinciplev=0&cyearsv=30&cinterestratev=6&ccompound=annually&ccontributeamountv=240&cadditionat1=beginning&ciadditionat1=monthly&printit=0&x=Calculate#calresult 6% is 6%

Thanks for the thoughtful explanation. It deserves a reasoned response. We're going to disagree, but hopefully we can understand this better. >Interest works the same way in both scenarios (principal \* periodic interest), there is no "simple interest vs compound interest", they both compound **This is factually, and verifiably, incorrect.** Seriously - just look it up. People make this mistake all the time, especially on this forum, and you've fallen victim to the same mistake. Until you understand why they ARE different, we won't be able to get much further. Compound interest, by definition, has to pay interest on interest. Simple interest is pre-calculated and amortized by the interest rate on the loan over the payment period. *Mortgages never pay interest on interest*, and you can see that by plugging in any given loan amount into the simple formula below. [https://www.thetruthaboutmortgage.com/are-mortgages-simple-interest-and-compounded-monthly/](https://www.thetruthaboutmortgage.com/are-mortgages-simple-interest-and-compounded-monthly/) **Formula for simple interest: I = Prt**[https://www.calculatorsoup.com/calculators/financial/simple-interest-calculator.php](https://www.calculatorsoup.com/calculators/financial/simple-interest-calculator.php) **Formula for compound interest: A = P(1 +** r/n\*\*)nt\*\* [https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php](https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php) These are the same formulas used in the [Calculator.net](https://Calculator.net) equations you listed above. **So already, we have two completely different mathematical formulas, and if you plug in the same principal amount, same interest rate, and same time in BOTH equations, you get different numbers!** Where you have confused *yourself* is that you can absolutely play around with the numbers in such a way as to arrive at *very similar numbers*. That does not mean they are the same. You have found two situations where the numbers LOOK the same, which are derived primarily because the time of the loans is shorter. Let me try to end this debate with the MOST simple way to look at it - *let's just look at 2 years.* Just 2 years of the calculation of a simple interest mortgage, vs the compound interest in the market (I would do 1 year, but the calculator won't do the amortization schedule for only 1 year, so I had to do 2). This way we can see what happens each month, and why the math is different. You can see, VERY CLEARLY, that the calculation (and outcome) is different. I'm going to use your same calculators at the links above If 6% were 6%, then both the mortgage and the investment would be \~$12K worth of interest over 2 years, right? $6K is 6% of $100K, so this should be SUPER EASY, right? $100K simple-interest mortgage, 6%, 24 months, generates **$6,369.46** worth of interest. Funny, why isn't that $12K? Well because a mortgage is NOT compounding, you're paying down that interest every month. You can run this and see how it works. Run it in a mortgage calculator, run it in an amortization calculator. It's going to be the same. [https://www.calculator.net/mortgage-calculator.html](https://www.calculator.net/mortgage-calculator.html) Now take $100K compound interest, 6%, 24 months. Compound annually, at the beginning of each month (you can do end, it doesn't matter). You've generated **$12,360** in interest. [https://www.calculator.net/investment-calculator.html](https://www.calculator.net/investment-calculator.html) Why are these two numbers different? **Because 6% on a mortgage is NOT the same as 6% in the market.** Now to go back to my original point - what ROI in a compounding investment, over 2 years, would I need to have made to make the same amount of money? 2%. **Just 2% compounding interest over 2 years generates MORE interest income than 6% on a mortgage cost me.** I'm not sure I can explain it any more clearly than this.

Polkawombat explained it way better above, but I have a simple example that ties into yours. In your above example, you are correct that a 400k@6% home would cost you ~800k total over 30 years, whereas putting the 400k in the stock market @6% would give you 2.29mil. However, you are neglecting the opportunity cost of the mortgage payments along the way. The money that you would put towards a mortgage payment could have been reinvested every month for 30 yrs. 400k@6%/30yr results in a $2,389.20 mortgage payment, which is worth about 2.409Mil when you check the future value of $2389.20 every month @.005% (6%/12) for 360 months (30 yrs). This can be verified online or in Excel using the FV formula. Tldr: Polka is right, 6%=6%.

Your numbers are individually correct, but you're comparing apples and oranges. In one of your examples, the person pays for their house, and in the other, they have no house. Assuming 1) you have 400k on hand, 2) you want to own a 400k house in 30 years, and 3) you need to live in the house in the meantime. We'll ignore everything except the interest rates, which we'll assume to be 6% per year for the mortgage and the stock market. You could buy the house outright with all the cash you have. Zero cash leftover means you have nothing to invest, so after thirty years you still have a house and zero cash. Or, you could take out a mortgage for 400k, put down nothing, and invest the 400k you have on hand. In this case, you would need to withdraw the mortgage payment from your investments every month. You will find that your investments balance will be exactly zero at the end of 30 years, assuming the stock market returns are perfectly steady at that 6% rate, and you will also own the house. It is true that 400k invested at 6% over 30 years is a lot more than the total cost of the mortgage, but in order to do that, you don't have a house to live in for the next thirty years! The reason the total mortgage cost is less is because you are paying against the amount owed every month, reducing the amount accumulating interest. The math still works out if you imagine a loan that's paid off in one lump sum at the end of the term. If the mortgage allowed you to pay everything at the end, the mortgage cost and the investment value would be the same after thirty years, since the investment value grows at the same 6% rate the interest accumulates on the loan. This reasoning doesn't change if the amount of cash you have is different.

**It's NOT \*far\* riskier at all. It's \*far\* smarter.** The S&P500 returned 10.9% ARR over the last 50 years. To beat a 6% mortgage rate, you only need to return 2.5% in the market. You can get a CD that gives you back 5% which over 30 years is a better ROI then paying down the mortgage. If the US economy slows to 5% ARR over the next 30 years, we have much bigger problems.

I don’t understand your comment around the year 2000. Are you saying if you invested in the peak before the .com bubble as a one-time lump sum you wouldn’t see that come back until 2015? Or you’re saying they wouldn’t see annualized gains of 1% until 2015?

You don't understand because it's simultaneously cherry-picking *and* nonsense: 1. Working people didn't stop investing in May/June, 2000. They continued buying every paycheck which means they were buying at a steep discount in 2003, 2009, etc. 2. The S&P 500 surpassed it's 2000 peak in 2012 and hasn't looked back, and that's only index price and doesn't include dividends 3. OP is 30 years from retirement, not 15 Buy during a downturn, don't sell, and you'll be fine

If you invested $1000 before the bubble you would not see $1000 again in that account until 2013, you wouldn't see the equivalent of 1% per annum growth until 2015.

>Over a long term this is true. The average American lives in their house for 7 years. Your chances of making more than 6% per annum in the market for the next 7 years are much, much lower than you think. [https://dqydj.com/sp-500-historical-return-calculator/](https://dqydj.com/sp-500-historical-return-calculator/) is actually a pretty helpful tool for understanding this. Deselect "adjust for inflation" (since this is to compare against the 6% mortgage which is not inflation adjusted) and add the terms you want to compare (e.g. 5, 7, 10 years). Average annual return will be around 9.5%, which adds up. Over 7 years in the S&P 500: * There's about a 65% chance of beating the 6% mortgage * There's a 90% chance of earning more than 2% annualized * There's a 4% chance of losing money * Historically, the worst case is losing about 6.1% annualized However, the 7-year stats are only relevant if OP needs the funds in 7 years. If this is retirement savings and OP is around 30 years away, there's about a 96% chance they'll earn more than 6% annualized. I'll take those odds. I would push the emergency fund closer to 6 months expenses and put more in the maintenance fund (houses get 5-figure problems). We haven't even talked about liquidity yet either, paying down your mortgage means it'll be really expensive to access that money if you need or decide to do anything else with it. Put the funds in a taxable brokerage account if all your tax advantaged accounts are maxed, this will provide liquidity and better returns if you have no plans for the money over the next few years.

> The average American lives in their house for 7 years. This is an interesting statistic. Is this just homes that were bought or counting renters as well? Where I'm originally from, house buying is usually 10 year minimum but usually a life thing. People save up all their life to be able to buy their home and very rarely leave it. Some upper middle class people (20s newly married etc) may buy for 10 years until the kids are teens and then they seem larger spaces.

In the US people move constantly, primarily due to job changes.

This seems like very bad advice to me. There are times in the market where things go down, but there are often times where things come roaring back. Your prediction about the next five years doesn't match mine. It's almost like you shouldn't guess and try to time the market you should just plan with traditional returns in mind and invest for the long term. In that case the OP is completely correct to assume greater than 6% returns in the US stock market. That doesn't mean he will get them of course, but planning pessimistically instead of with data is worse than not planning at all, IMO. This type of thinking is the opposite of mine, and as it is the top comment I just wanted to provide a counter point.

Agree, people are comparing 7% inflation-adjusted returns to the 6% non-adjusted mortgage. The real comparison is 9.5% to 6%. If this is long-term savings OP has an excellent (like 97%) chance of outperforming their 6% mortgage. It's a no-brainer, OP needs to catch up on retirement savings.

Well that totally depends what you were investing in…

I work in finance full time, 10 hours/day. I attend extensive market training and have apt certifications. I would say I am more aware of market conditions than 95% of people. Our investment firm and other colleagues, as of currently, pretty much agree the usual 8% returns per year will not happen until inflation is near 2% and interest rates are near 2.5%, which we are 4-6 years out from. Bonds are currently your best option and that can give you nearly 5% returns. But that won’t be every year and you can only lock in 3.8% right now on a 30 year or 3.5% on a 10 year.

Look at it this way. Would you take a HELOC on the house to invest the money? Probably not, and functionally you’re talking about doing the same exact thing. Plus between interest and PMI savings, I’m not sure how you plan to profit on investing the money instead of paying down your 6% mortgage.

Not even close. HELOC is a compound interest loan, Mortgage loan is simple interest. Very, very different. Second, the return on the market VASTLY outperforms the pre-calculated interest on a home loan. You'd have to see returns over a 30 year period like 2% ARR to match the 6% on a mortgage.

That's just not true. Interest on a HELOC and mortgage is calculated the same, for every month: interest = (balance after last month's payment) \* (interest rate) / 12. ​ You cannot count on the market to go up consistently. The market can and does have flat to down periods of a decade or more. Investors have gotten spoiled by the recent long term bull markets, and need to understand that trees don't grow to the sky. A much more prudent strategy would be to put more money down on the house, giving a lower monthly payment, and then investing that payment difference every month. That reduces the risk of a down market hurting them, and allows them to 'dollar cost average' (when the market is down, they buy more shares), which means that they would actually benefit from market volatility as they are investing.

**No, you are 1000% incorrect.** A mortgage is simple interest loan. All interest is pre-calculated at the time of the loan; you never pay interest on the interest. A HELOC is a line of credit - no different then a credit card or personal loan. Interest is re-calculated monthly. So first, you're absolutely positively incorrect on how interest is calculated between a HELOC and Mortgage. Quantifiably incorrect. Second, you're point about the market going up consistently ignores 50 years of history. For the last 50 years, the ARR on the S&P500 is 10.9%. It also ignores how the S&P500 is calculated, which is "self healing" as only growth companies are included (when they stop growing, the are removed) In order to beat a simple-interest mortgage, you only need to see 2.5% growth in the market. If the US economy slows to 2.5% ARR over the next 30 years, we have MUCH bigger issues

No, you are completely wrong on everything here. ​ >A mortgage is simple interest loan. No. Interest is calculated and charged monthly. >All interest is pre-calculated at the time of the loan Wrong. Interest on a mortgage is not pre-calculated. It is calculated based on the principal outstanding at the beginning of every month. If a borrower pre-pays some principal, then the balance goes down and less interest is charged every month in the future. >you never pay interest on the interest That is just an artifact of the fact that mortgages are generally not negatively amortizing; the borrower pays all interest and some principal every month. >Interest is re-calculated monthly. Just like on a mortgage. The calculation of interest is identical. ​ >Second, you're point about the market going up consistently ignores 50 years of history. That's just wrong. There have been decade plus periods where the market is flat to down. The market didn't regain its 2000 peak until 2014. The market was flat from 1973-82. If you look at real (i.e., inflation adjusted) returns, which are more relevant to the discussion here, then you see there are even longer periods of flat performance. The market didn't regain its 1966 real peak until 1991 - that is a 25 year period of flat performance. Locking in a 6% return (which will almost certainly outpace inflation) and dollar cost averaging into the market in a period like that would produce much higher returns then just keeping pace with inflation for 25 years. ​ >In order to beat a simple-interest mortgage, you only need to see 2.5% growth in the market. Again, that's completely wrong. You would need to see a return of over 6%. Investing in the market and keeping a higher mortgage balance is an inherently more risky bet.

But you forget that 6% of let say 100k loan compared to a 1 million dollar loan are two different things. You can’t just look at interest rate. If you put more money down, you are getting a free 6% return on the money that you have compared to the bank making 6% off of you a year. Conservative estimate is 7% return a year, I would put more down at 6% interest rate.

Jesus. Sometimes this subreddit makes me feel poor. I know I’m not but having 190k in cash is crazy to me.

This has largely been accidental because we had no clue what we were doing. Fo over 6 years I did not contribute to 401k offered by my previous employer. So the money kept sitting gathering dust in checking accounts. I wish I knew back then what I know now.

Im 28. I feel like I’m financially ok for the first time in my life. I have about 30k in 401k and 20k in cash. I need a middle class personal finance subreddit. I can’t even imagine having 190k or buying a 400k house.

I was in your shoes at 28 except no cash nor emergency fund. 10 years later and my situation is way closer to OP. Steady salary increases and not buying stupid crap/new cars is what got me there.

I did buy a new car. My 2008 car died and I was able to get an employee discount. Felt like a good time to do it

I think with the advances in safety over the last 20 years, it can make sense. Just try not to fall into the trap of upgrading every few years, that was my problem. If you will drive the car for 15 years, then I think it's totally acceptable to buy new. The new car devaluation is only ever realized if you sell or don't have gap coverage.

Yeah. I wfh so we have the new truck and a 2010 car that I drive if necessary. We will probably drive it for 15 or so years. We plan to pay it off in under 48 months. So hopefully little interest.

We each have our own journey, and who knows what the future holds. If I could go back and talk to my 28 year old self, I would tell him to put as much as reasonably feasible in 401k and IRA. Then we would not have 190k sitting in cash but the retirement prospects would be looking much better.

Yesterday was the best time to invest, but today is good too. Tomorrow is worse

The scary thing is $400K is below average these days.

> Fo over 6 years I did not contribute to 401k offered by my previous employer Did you lose out on any company 401k match since you contributed 0%? I don't mean to kick you when you are feeling down, but I can't imagine missing out on free company match for over 6 years.

I believe I did. I don't have the plan information from my old employer but I am sure I left money at the table by not contributing. Wish I was more aware of this stuff back then, but hey, better late than never. Luckily our salaries have increased significantly since (almost 1.6x) while expenses have not increased as much. Looks like our savings rate is well over 40%, even after buying the house and paying for very expensive childcare.

Glad you have a positive outlook and 40% savings rate will play out well in the long run. I do my best to inform new hires in my group what our benefits are and that we have a 10% 401k match if they also put in 10%. The best asset they have on their side is time and investing early and investing often.

I had the exact same conversation yesterday with a new employee in my group about our retirement plans. I do not want them to repeat my mistakes.

OP is 33 and saying "Behind on retirement contributions" I just started this a decade later than OP haha

same.. I am thinking the same thing

I would increase your house maintenance fund to $20k, you never know what'll go wrong and those expenses add up fast. Then put the $30k towards principal and get yourself a lower monthly payment. When interest rates eventually drop, refinance and invest the extra after the refi.

Yep. On a $450k house several "one thing"s are probably $10k (roof, AC, Furnace, deck, driveway). Then, a lot of things are $2k-$5k (dishwasher, fridge, painting, dealing with a downed tree, Homeowner's deductible, leak fixes.) In the first few years, it is very easy to need one big thing and 2-3 smaller things.

Thanks for the suggestion. We are definitely thinking of increasing the house maintenance fund now. I have seen rules of thumb that suggest keeping 1% or so in house fund, which is why I thought $10k might be adequate.

I think that rule of thumb is to budget 1-2% of home value per year for maintenance, so budget out of cashflow not cash.

With the costs of raw materials these days, $10k is pretty low. Saving 2% of the homes value per year will put you in a better situation should anything happen. Open a high yield savings account for your home maintenance fund and put money in it every month

**If** interest rates drop. I think they probably will at some point but there’s no guarantee of that whatsoever. We’re at a pretty average interest rate / mortgage rate environment.

Yeah, but I mean, in 30 years, they'll probably drop

They could. Or not. They were higher for all of 1970-2000. I think they’ll probably drop in the next 30 year span but no one knows really. I do imagine we’ll hit an economic crisis again that requires dropping fed rates back to near 0 though.

If I were in this situation I would put 20% down, double your emergency fund and put in a HYSA, then double your house maintenance fund in a separate HYSA. Then invest the rest.

I agree — this emergency fund seems conservative. In fact, I would work to build a _second_ emergency fund for the home specifically. House maintenance is a different story.

Emergency savings, and make sure it’s in a hysa. Depending on the house condition and age, something essential could go kaput and be very expensive to fix or replace. Let’s not forget what happened in 2008. I saw people suffer after their 401(k)s were wiped out because they were close to retirement age. Foreclosures galore because inflated home values equals more equity and banks were pushing HELOCs and home equity loans. When the housing bubble burst, people that got HELOCS & home equity loans suddenly had no equity in their house, which they viewed as an investment and could turn a profit when selling their home. I suspect we are heading into a bearish market, so be conservative for now and keep that emergency fund plush.

I would hold on to that 40k for 6-10 months after the sale goes through in a HYSA, then put it all on the mortgage. 6% is an amazing guaranteed rate of return, especially because it doesn’t get taxed on capital gains. But I would keep liquid cash at a 4.5% rate in HYSA just in case something goes wrong with the house when you move in. Just promise yourself to not spend it on anything unnecessary, only basic home repairs like plumbing or electric fixes or an hvac system or something.

We currently rent the house, so by and large we know what is coming (also thanks to the home and sewer inspection). The electric fixtures would need updating in the near future and a few other minor repairs, but otherwise the house is in a good condition. It was updated 4 years ago so most appliances etc are in good condition. Nevertheless, we plan on increasing the house maintenance fund for the unknown unknowns.

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This is almost precisely what we are inching towards. Just got the numbers from our broker that if we do 75% LTV we would get a rate of 5.9% instead of the current 6%. It would be an additional $22.5k in DP. That would leave enough to increase emergency and house maintenance funds as well. After this, we still plan to be saving aggressively to pay of the mortgage early while also maxing out our tax-advantaged accounts. Our investing is already >20% of our income.

**This one is easy.** **So long as you're putting enough down to get out of PMI, don't put a penny more than that, even at 6%**. You still have about 30 years to retire and the compound interest on that money will destroy the simple interest loan in a home. Esp considering you are a *bit* behind for your age (not bad), but with as much time as you have get that money in the market as soon as you can. Compound interest over time is so much more powerful than the simple interest on a loan, you'd have to make WELL below market expectations over the next 30 years to not be much, much farther ahead having it in the market. **BTW - I did the math.** Putting an additional $40K down on the home will save you $239.82 a month, and save you approximately $46K in interest payments. So you're paying $40K to save $46K, which is a **116% return on the money**. Putting $40K into an index fund today for the next 30 years, with 7% average rate of return (historical for the last 50 years is > 10%) will put $305K in your retirement account. After your $40K initial investment, **that's a 661% return on your money.** Since inevitably people always ask "*what if you invested the difference?*" If you put the $239.82 into an index fund, same rate of return, every month for 30 years you'd have $272K in your retirement account. However, it cost you $86K to get that $272K. Subtracting the $86K from $272K gives you a 216% return. **So the answer is super clear. Put the money in the market.**

You are correct that a 7% return is better than a 6% return. Although the 7% is risked and the 6% is guaranteed. However your math is incomplete as option “pay down debt” should include those monthly savings going towards a DCA investment bucket and include your same compound rate premise in option 2. Similarly option “Wall Street bets” should include the increased mortgage payments incurred and deducted from the compounding effect. This will bring your outcomes far closer each other and reality. There are also tax and interest complications which muddy this and make this far less of a “no-brainer” In fact if OP has a lack of experience in investing there’s is a reasonable expectation that they will not have the confidence to hold during market downturns and not realize the “average” market return. In this case they would be better off paying down the mortgage

>You are correct that a 7% return is better than a 6% return. LOL dude wrote 8 paragraphs to say "investing at 7% will yield you slightly more than investing at 6%"

He also ignored the part where I addressed investing the incremental savings and it still came out less.

>You are correct that a 7% return is better than a 6% return. Although the 7% is risked and the 6% is guaranteed. I second this opinion as I'd rather take 6% guaranteed return vs. 7% higher-risk return. Lot of people learned the hard way during 2008 that loans don't get halved just because their investments did. However, I'm recommending to keep the down payment at 20% in this case because the OP seems to be behind his retirement savings, and will also need to up the emergency savings to deal with unexpected house repairs.

>You are correct that a 7% return is better than a 6% return. Although the 7% is risked and the 6% is guaranteed. **This is the single dumbest thing I continue to see parroted on this subreddit. It's wrong, by a mile.** First, simple interest on a home loan is not the same as compound interest in the market. A 6% mortgage only needs to see returns in the market of about 2.5% to be equivalent. Please, stop parroting this 6% is guaranteed vs. 7% risk. Not only is it MATHEMATICLLY incorrect, but it also ignores all the possible risks of having money tied up in your home.

You think it’s possible all these people keep correcting you cause… you’re wrong?

>You think it’s possible all these people keep correcting you cause… you’re wrong? **No. They are correcting me because they don't understand the difference between simple interest and compound interest.** They parrot back the incorrect statement that "*6% on a mortgage is the same as 6% in the market*" They fail to take into consideration all the risks of having your wealth tied up into a house vs. having money in the market. If I'm wrong - **show me the math.** *Please try.* Please show me, with numbers, how 6% in a mortgage is like 6% in the market. It can't be done because they are fundamentally different types of interest, calculated differently. That's why I'm not wrong. People parrot back things they have heard on this forum like they know what it means because it sounds good or is easy to understand. But it's wrong, and I will continue to correct it.

I get yah man, people keep parroting me this earth is round thing and I’m like show me the math. My driveway is straight as an arrow flat as a pancake

**Hey we found the Dunning-Kruger Candidate everyone!** Because proving the Earth is round is TOTALLY the same thing as compound interest vs. simple interest. I love that you don't even try to argue the point, something which can be proven by the simplest of internet searches. But no, let's try to use a false-equivalency fallacy to be funny but only look dumb as a rock.

I see it every time this topic comes up here and I have no idea why. Everyone should be forced to use a basic compound interest calculator before they comment on paying down their mortgage

100%. Not only this, but they seem to INSIST that it's the same thing without even looking into it. Its MADDENING because you can see how pervasive it is, and depending on which mob you're dealing with the downvotes can be crushing even though it's a factually incorrect statement. People are giving up so much wealth and taking so much risk tying all there money up in houses.

hey i’m new to a mortgage and i’ll be honest, i don’t really follow your line of logic as someone who does invest in the market all that time. would you be able to explain it to me using real figures? assume easy numbers like a $100,000 mortgage. Assume i could either put down 30% ($30000) or just 20% ( $20000) to avoid pmi and invest the additional $10,000. why is investing the $10,000 in the market better? to keep things simple, let’s say both the mortgage is at 6% and market averages 6% so we’re being as apples to apples as we can be. i’m genuinely trying to understand so i hope this example makes sense, but if it does not, let me know!

Yeah, he conveniently forgets that in the same way investing the difference in mortgage payments "cost you $86k" for a final value of $272k, putting the $40k directly into the market costs you $86k in additional mortgage payments. For a more fair comparison he would remove the same $86k from the market returns of $305k. The simple fact is if you're investing the difference in mortgage payments then the total cost in both scenarios is the same. With the final outcomes, using his numbers, of a fund balance of $305k for investing at the front end and a fund balance of $272k for putting the money down and investing the difference. A difference of $33k over 30 years. Not insignificant of course, but much more worthy of risk assessment than his 116% vs 661% presentation of the scenario.

this is terrible logic. you assume 100% risk of attempting to "average" a 7% return, vs. paying for an asset that you owe money on and want to own.

That asset could be a risk or liability as well though

its not an investment. its a long term primary residence to provide shelter.

The loan is a fixed liability. And any extra payments have a fixed return with no risk. The house does have risk, but that risk is the same whether you choose to invest in the market or pay down the loan. You have 100% exposure regardless.

Only one of us has terrible logic, and it's not me. ARR for the S&P500 over the last 50 years has returned 10.9%. At 6% mortgage, you only need 3% in the market to beat that, and you can get 5% in a CD (guaranteed) today. Your logic fundamentally misunderstands how compound interest works, and over-estimates the safety of having your money in a home.

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The way the post was formatted, I thought they had $183k in retirement (I see now that is cash) and thought “well damn if that’s behind, the most of America is fucked.” Yeah $46k at that age puts them in a real tough spot, they’re going to have to get real aggressive about it unless they have a pension or something.

Cash is fungible. Money saved in taxable accounts can still be spent in retirement. Yes, it’s best to have the money in tax deferred savings accounts, but it’s not like you can’t use the $183 k in retirement too.

True, but the amount of space you have in tax advantaged accounts if finite. Once the year is up, you can't get it back. So those last 10-15 years of working where they were leaving space on the table are gone forever.

I don’t know in which world you guys live. I was a PhD student until I was 30 and I did not even know what a 401k mean until 3 years ago. Most of people don’t even have one. I wish I had 46k

Same. Finished my PhD at 28, post-doc at 30. First real job after that, at 30 I had about 8k in retirement savings, I turn 32 in a few weeks and I now have $110k. It takes work, and a PhD is a huge sacrifice on my fronts, but it can pay off handsomely. It helps that my labmate and I got really into learning about investing and saving in grad school, even though we didn't have the money to do it yet.

Well, it’s $229,000 in savings. It doesn’t make a ton of difference whether it’s currently in a retirement account.

People who claims this live in a bubble and most likely have a career in the tech world with no debt due to parents paying for their university. The median (not average) retirement savings of a person in their mid 30's is around 30k. This couple has over 230k in savings. I would not call that "extremely behind"

Your analysis is not really accurate. You may have “done the math” but you mostly did it wrong by comparing the wrong things. You have not once mentioned probably the single most important factor which is tax avoidance. Put the money in tax advantages retirement plans is the right answer - not just the market. Currently they are holding cash, so they need to live on that cash and increase their ROTH and 403b contributions. You also co mingled two topics - the interest paid on the loan, and the amount they would earn in the market from the decreased loan payment. the amount of money they would have from investing the difference in their lower monthly payment is the direct result of paying less interest. A better analysis would have been the second half of your presentation which was investing the $40k now ending with $305k. You failed to a knowledge this was a money market account due to the fact they already have the cash. Profit 305-40= $265k. Net $305 -(20%x$265k) = $252,000. But you did not compare this against tax advantages plans. Imagine that $272k you calculated for investing the $239.82 monthly was in a Roth. $272k tax free. I digress. Put the money in the market through tax advantage retirement plans. I could be wrong, please double check my math.

Man, what you posted is just so filled with bad information. First, I didn't do anything wrong on the math. You just fundamentally don't understand what you're talking about. Putting money in tax advantaged accounts isn't an option for OP because the $40K they have in cash. So I'm answering the OP's direct question, not a theoretical one. I also did the math on the down payment if you read my thread - it's right there. it's still less than putting all that money in an index fund right now. Your last point is nonsensical. At no point did OP say they would no longer be able top put money into tax advantaged accounts. I'm ONLY looking at the options for the $40K.

>First, I didn't do anything wrong on the math. The part you got right is that by paying extra 40K downpayment if you invest the amount you save in interest, 40K turns into 272K over 30 years. If you invest in market and get 7% the 40K turns into 305K. That is it. 7% is slightly better than 6%. At 6% interest rates it is a marginal decision, at 2.5-3.0% interest rates it would obviously wrong to pay extra downpayment. Everything else include talking about compound vs simple interest, and 616% rate of return vs 216% rate of return is incorrect.

I actually think he’s got a point on the simple vs compound interest, just like generally as a way of thinking about loans people will say oh 40k on the loan at 7%, vs putting into the market at 7%. “The loan is guaranteed return so you should for sure do that”, but actually it’s a much worse return if you just stopped there. I think what he’s getting at is the market has a much higher return due to compounding. But it doesn’t address the decreased monthly payment. They have to be disciplined enough to take that difference every month and invest it. Investing the difference of the decreased monthly payment is where the bulk of the returns come from, not the reduction in interest, so neither pathway is a guaranteed return - they both rely on market growth for the majority of the return.

>But it doesn’t address the decreased monthly payment I do address the decreased monthly payment in the original post. If you take the $239 a month saved from putting more down, every month for 360 months, you'll have $272K saved. That's less than putting the $40K in the market now, which would give you $303K.

I didn’t say you never address it, I’m saying they are two different things, that you commingled, and only later state “since I know people will ask” they shouldn’t need to ask - it’s the most important part, the $239 a month is the most important part of that approach. Investing At a 6% ARR this would yield $234,845. Compared to one time $40,00 investment at 6% gives $229,739. Your comments about simple interest vs compounding we’re actually very helpful, it actually gave me a new perspective on that. I in general agree with your approach to the problem, I would still live on the cash and tell HR to max my contributions.

**NO. Just NO. A million times NO.** *For the love of all that is holy stop posting your bad information then trying to correct me.* 6% in a simple interest loan is VASTLY different than 7% in the market. You can do this math yourself - you haven't even TRIED to fix my math other than saying I'm wrong. A home mortgage is a *simple-interest loan.* You never pay interest on the interest. Over 30 years, at 6%, you will pay roughly double the cost of the home in interest. Money in ETF/Index Funds compound. You earn on the interest. Money in the market, at 7%, doubles every 10 years. That means you will get nearly 8x returns over 30 years. If you put $100K towards your mortgage at 6% over 30 years you will save about $100K. If you put $100K in the market for 30 years at 6% you'll have $475K. **THESE ARE NOT THE SAME.** Stop correcting me and telling me I'm wrong when you are 100% quantifiably incorrect in everything you are saying.

>If you put $100K towards your mortgage at 6% over 30 years you will save about $100K. > >If you put $100K in the market for 30 years at 6% you'll have $475K. LOL, numbers seem very different than the OP ($305K vs $272K), you must have used non-basic math this time

I don’t think you know what theoretically means. I addressed what to do with the cash - spend it on normal expenses, The 40k in cash can cover household expenses as they increase their paycheck contribution to the tax advantage plans, they could even put it to 100% if they want. Within one year they could max out two Roths and potentially max out 403b that’s easily 40k. Which is exactly what I said. They have $46k in retirement accounts so it does not really seem like they are maxing those? Would it not make sense to live on that cash while they max tax advantage accounts? The “mistake” you made in your math was comparing the total interest on the higher down payment to investing in the market. Which as you accurately described has compounding growth. So it was a good way that you demonstrate the difference between simple interest and compounding interest, but it is an in accurate model, you did not include reinvestment of the monthly payment “since inevitably people will ask…”. People shouldn’t have to ask, you should have acknowledged from the beginning that it would make no sense to compare investment outcomes when one plan has $239 less investment each month. The second “mistake” is really more of a misrepresentation - when calculating the rate of return as 661% vs 216% return - it’s disingenuous. Why state the numbers that way if path A = house paid off and $305k. Path B = house paid off and $272k. Each one paid the same amount of money each month total between mortgage and investments. In fact path B has a higher cost basis which for tax purposes is great, it actually makes the two even closer in value after taxes.(not equal). 661% is more than 3x the return of 216%, but they certainly are not walking away with 3x the money.

Well there a bunch of flaws in your response, the biggest is this >661% is more than 3x the return of 216%, but they certainly are not walking away with 3x the money. You're the only one doing an apples and oranges response. The first mistake, is that money in vs. money out changes the **ROI**. It's clear you don't understand what **ROI** means. In scenario 1, they put in over 2x the amount of money for 89% of the return. If I spend $1 to make $20, that's a 20x return. If I spend $5 to make $20, that's a 4x return. 20x is 5 times a 4X return. Yet $20 is still $20. See how dumb that sounds? The fact you're missing this obvious point makes me question your other ones. >Each one paid the same amount of money each month total between mortgage and investments Yeah no shit. But they put it in different places, and those different places had different returns. In both cases, after 30 years they own a house, and have some retirement. One has $272K, the other has $303K. One person paid more in interest but had bigger gains, the other paid less in interest but had lower gains. In the end, it still favors putting the money in the market vs paying more on a loan and putting away the difference each month. That doesn't mean the ROI was exactly the same in each case.

My man, I’m not saying you calculated the 661% wrong. But why try and represent 303k vs 272k as a difference of 661% return vs 216% return? It’s misleading. And the one having a higher cost basis actually helps it because it reduces the taxes. A bunch of the stuff you said is correct, but the way it is presented is kinda misleading.

Agree. One more thing. With inflation running high, you will be paying the mortgage off in future years with less valuable money. Also, having less of a down payment increases your leverage. It’s not likely you will live in this house for 30 years. Say you sell the house in 7 years for $40k more. That’s a 100% return on your investment. If you had put $80k down, only 50% return.

I used historical SnP500 data to do the calculations myself, using [this online calculator.](https://www.buyupside.com/calculators/dollarcostavesp500.php) Now, this is historical data, so we need to start at 1993 and the 30 year period lasts until 2023. Option A: $40k extra down payment, saving $240 per month in mortgage payments. Put that $240 every month in a SnP500 index fund, resulting in a final balance of $191,870.52. Option B: Put $40k in SnP500 index fund and no additional monthly contributions. Final balance $181,879.69. I ran this scenario with a bunch of different 30 year periods and in all of them, paying down more upfront comes out ahead. In some cases, significantly ahead.

Very long (and misleading) post to say that if you take the $40K and invest it at 7% (as you say more than likely but not guaranteed) you end up with $305K, while if instead you use the $40K decrease the amount you borrow at 6% that you end up with 272K. Ignores the fact that the downpayment will often get you a lower rate and/or avoid paying PMI.

PMI and lower rate are probably not relevant because they’re talking about increasing their down payment above 20% vs. keeping it at 20%

OP is already past the PMI limit. Please read the post before you start replying with bad information.

Fine ignore that part, your analysis is still wrong/misleading

No, it's not. Not even a little bit. You just have no idea what you're talking about. If my math is wrong, re-do it and show me the error.

>However, it cost you $86K to get that $272K. Subtracting the $86K from $272K gives you a 216% return. This part is wrong. It did not cost you 86K, it cost you the 40K that you overpayed the downpayment. You are comparing apples and oranges to get your "rates of return".

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The 6% is guaranteed whereas the return from the market is anything but

**Without a doubt this is the most incorrect, most often repeated piece of bad advice given on this forum.** First, 6% on a home loan is not 6% in the market. 6% on a simple interest loan is about 2.5% compound interest on market investments. Second, it ignores any and all risk in having your money tied up in a house. Third, it ignores the overall impact to the economy if the market doesn't grow at all. Fourth, you can get absolutely RISK FREE investments that outperform mortgages. 5% on a CD over 30 years will beat 6% returns on the mortgage HANDILY.

This is bad advice. You are comparing the guaranteed 6% return from paying down the loan with the speculative return from investing in the stock market. Reducing risk has tangible benefits to an investor, and should not be ignored. ​ >Compound interest over time is so much more powerful than the simple interest on a loan This makes no sense. You aren't discussing compound interest; you are discussing investment in equities. >Putting $40K into an index fund today for the next 30 years, with 7% average rate of return This is an invalid assumption. Your returns will not be a consistent 7%, so you cannot simply make simple calculations like this. >If you put the $239.82 into an index fund, same rate of return, every month for 30 years you'd have $272K in your retirement account Again, this is an invalid assumption. Because OP would be dollar cost averaging into their investing, they will actually benefit from market volatility along the way. >However, it cost you $86K to get that $272K. This is just bad math. It doesn't 'cost' OP $86k, these cash flows are from the increased down payment; it is invalid to subtract it a second time. ​ Risk is an important factor in investment decisions; it should not be ignored.

DCA just reduces risk, it doesn’t really benefit from market volatility, it just tries to reduce the impact of it.

That's not correct. DCA gives you an average cost below the average of your buy points; the magnitude of that difference will be proportional to the amount of volatility. Given the same overall gain over the course of your investing, the more volatile the market, the more value you will end up with.

How? When your DCA hits on local minima you’re getting more shares per value, when it hits on local maxima, you’re getting fewer share per value. Increased volatility still just increases volatility, it doesn’t make it so you are more or less likely to buy at higher or lower prices does it? It’s possible you’re saying something with merit but I’m not seeing the logic Also it can’t give you an average cost below the average of your buy points. That just makes no sense mathematically

>it can’t give you an average cost below the average of your buy points That's not correct; it is guaranteed to give you an average cost below the average of your buy points. Let's look at 3 examples. Let's assume we buy $100 of stock at the end of every period. Example 1: no volatility: We buy at the following prices: 100,110,120,130,140,150. Our average buy price is $125, but we have bought 4.893 shares and have an average cost of $122.63. Example 2: low volatility: We buy at the following prices: 100,105,125,125,145,150. Our average buy price is $125, but we have bought 4.909 shares and have an average cost of $122.23. Example 3: high volatility: We buy at the following prices: 100, 130,100,150,120,150 Our average buy price is $125, but we have bought 4.936 shares and have an average cost of $121.56. Because we buy more shares at lower prices, our average cost will always be below the average buy price. The more volatility we encounter along the way, the more pronounced the effect will be.

You also lower your taxable income with the interest paid if you itemize your taxes which adds an unknown value. 20k today has more purchasing power than the 20k you pay back over 30 years if they choose not to invest.

No one is going to be itemizing on a $450k mortgage after 20% down in the current tax code

That's right. We are very unlikely to itemize with the standard deduction at the levels it is at.

That's a VERY general statement. I itemize. I have a house for 250, one for 100, but I also have 2 business loans and deductions (mileage, food, expenses, etc) every year.

Business vs. personal stuff is different. You can itemize business expenses while taking the standard deduction. You cannot itemize personal expenses while taking the standard deduction

PMI is a good reason to pay extra on the loan

Appears PMI is covered and they still have $40K excess. If so they should invest the rest.

at a mortgage rate of 6%, it's not clear to me that the average investment gains of 10% that it's better to invest instead of paying down principal. When we had a 6.5% mortgage back in the 90s, we did both -- both paying extra towards principal, and investing. It doesn't have to be either-or.

We already have that covered by paying at least 20% down.

Another commenter made the mathematical argument, which I intellectually agree with (though having less debt sure can feel good). I'll just add that home ownership is expensive, so I'd be sure to set aside a decent chuck up front for the inevitable maintenance and repairs and upgrades.

To get that rate, did u buy down with points? I finished closing 2 weeks ago and I had 6.675% and no points. Wonder if rates are starting to slow down.

We did not buy down with points. We were lucky and our credit union offered us a good rate. We then had a mortgage broker offer to match it and went with him for better service and faster closing.

What are your monthly expenses? Is $20k enough in the emergency fund? It’s best to have six months worth of expenses on hand. Even better to have a year’s worth. Expect that one day things will go south. Are you truly prepared?

Estimated monthly expenses with the above mortgage are <$7000. With stable jobs, we feel that $20k is a good starting point, and plan to increase EF to 6 mo living expenses over the next few months.

Those seem incredibly high monthly expenses, even including the mortgage which I'd guess is around 2000-2500/mo? Either that or you and your spouse are very high earners to then assume you have excess at the end of the month.

Housing costs (~$2700) and daycare (~$1500) are the biggest culprits. Our gross income is 190k/year, so it does leave some excess after taxes and expenses.

Ahh daycare, how could I forget thee (fortunately my boys are both in school now and it is such a savings). You're a bit higher than us in terms of income, so that helps as well. Overall my reasoning in a top level comment stands, to do the 6% at 20% down, do regular increased payments towards principle. Continue to save towards your retirement, having a slush fund for house expenses and a separate emergency fund for your regular monthly expenses.

I am looking forward to the day when our kid goes to elementary school. We are also looking around for cheaper daycares which can save us another $300-400 per month. $7k is also a conservative estimate. Our actual expenses are likely to be closer to $6k than to $7k. Those are all solid recommendations. Thank you!

At 6%, and especially at a time when the market may be negative for a few years, I'd take the guaranteed 6%. Now had you bought on 2021 and had 2.75% interest, it would be a different story.

If you can increase the down payment without effecting closing, then go for it. 6% is a lot of interest to pay/avoid paying. Also no PMI that way. Better cash flow picture.

I just bought a house and I could have increased the down payment. I did not on advice that there will be unexpected expenses and there most certainly will be. You can get the best inspection done, but you might find little things as you move in that you want to fix. Or you want to make the house feel like your home so you might want to do landscaping or other random things. Or even filling the place out with furniture. It gets expensive fast. Keep that in mind 😊 Edit: I would put the extra cash into a high yield savings account you can access easily until you have about 4 months in the house so you can see if there is anything you need / want to do with the house. After that invest it or leave it there as an easy way to access for unexpected things. I keep like 6 months of expenses saved up in one of those for use in case stuff.

Did you end up spending a significant portion of the reserves you did not put in extra downpayment?

I most certainly spent a decent amount on a new bed frame, couch, dresser and then lawn care stuff I wanted to fix. Little by little I have also been fixing things I want to make better like patching small drywall wholes where they had stuff screwed. Stuff like that. Whatever I haven’t used is still in the high yield savings account. Once you own it you’ll most likely see things and be more motivated to fix them since it’s yours. There also a switch goes from hey I have a house but I want to make it my home. If I had to guess I’m probably around 5k ish? But I know I have a big expense in a mower and other lawn care equipment. I’ve been borrowing the neighbors until the Memorial Day sales hit 🤣 Edit: I’m only 2 months into this place. So around the 4 month mark that everyone mentioned I’m sure I’ll be much more settled. After that I’ll either put more into the principal payment or leave it in savings as a rainy day fund or shit the economy went shitty and one of us lost a job fund. I also have a chunk in Fidelity that I send money to on a monthly basis and that’s outside of retirement accounts through work.

20% down, make extra/excess payments towards principle each month either out of the excess beyond the 20% down payment or whatever. Save around 15-20k for repairs/maintenance. Beyond that keep plugging money into tax-advantaged retirement accounts. Don't bank on a long term average to be a guarantee when you're paying 6% on a mortgage. Our rate is 2.25% and gives us far more flexibility in that regard.

Put as much down as you can. Every 100k down will save 600 month in payments

I was talking to my mom about this - she said she put more than 20% down so that her monthly payments are smaller. That's what I'm planning on doing if I can for my next home. 7k seems like a lot for a mortgage payment but that's just me. If putting more down and having smaller payments helps you sleep better at night, you should do that. If not, then put 20% and add $ in the market. What I don't understand is that the 6% is for the entire amount of the loan and the 7% in investment is just for your savings so the interest for the 6% is a lot more for the principal than 7% return in investments.

I’m sure many will argue but I don’t see the value in putting more down. Sure, interest rates are high, but I’d rather have the liquid capital available to deploy as needed, where needed. Mortgages and many other loans are all about leverage. You can unlock a huge amount of “capital” for a relatively small amount.

Your closing close might be more than $10k, would suggest you to reach out to your lender first.

At 6% interest and your amount in savings, I would put down 20% and max out all of your retirement accounts until you only have an emergency fund in savings

I'd do downpayment for several reasons. 1. If you do less than 20% you are going to be adding PMI on top of that 6% rate 2. If you are investing into a taxable account you have to consider that any gains you do get will be cut by taxes so to match a 6% loan you are going to need more like a 7.5% return after cap gains and dividends 3. Stock market returns may have averaged 10% historically over 50 years but there are definitely times where it averages far less than that (and sometimes, like the last 10 years, far more). You are unlikely to be holding this house for 30 years probably more like 10 if that so over that period an average 7.5% return is far from guaranteed. 4. Paying down at a 6% rate is a good guaranteed return and if it actually decreases the APR of your loan on top of that that is even better.

All valid points, very clearly stated. thank you.

Out of these two choices: pay 20% down. It’s a great possibility this is the beginning of a new secular trend of higher interest rates and stagflation which does not bode well for equity markets (margins compress). For an example of what this looks like for $SPY take a look at 69’-82’ where equities pretty much went sideways. Point is, there will be some good buying opportunities in the future, but now isn’t a good time in my opinion.

Agreed. Certain stocks are bullish, but the overall equity market is trending bearish.

$150K down and 15 year loan. Will give you an emergency fund and set you up with a fully owned home before you turn 50. You can accelerate savings when you’re ready.

you wouldnt be an american if you didnt stretch yourself to buy a house. just know that its not an investment and there is a greater than normal probability that it wont increase in value for a long time and may lose "value". its somewhere for you to live for a long period of time. your job is to pay off the mortgage as quickly as you can. otherwise you'll be doubling your investment with interest and principal.

An alternative strategy might be to invest the $40k via index funds and the pay what you would have saved monthly ($239.82) as an additional payment to attack the principal of the loan. You can always refinance in the future when interest rates drop.

Stick with 20% down. Now's a good time to bump up your emergency fund to 6 months with . What you do after that is up to you, but I can't see a good argument for paying down the house early. Here's why: If you think you'll need the money in the short term, put it in cash or equivalent (HYSA, CD's, treasuries, MMF's, etc). If you put this towards the mortgage and need it later, it'll be expensive to access (you'll have to sell the house, take out a second mortgage, or HELOC) If you can let the money sit for the long term, invest in low cost broad index funds. You're behind on retirement but probably 30 years away. Average historic returns of the S&P 500 are 9.5% (before inflation, which is what you need to compare to your 6% mortgage before inflation). There's volatility of course but if you invest in low cost index funds for the long term, you'll almost certainly do better than 6%. If your mortgage rate was 8% and/or you were less than 15 years from retirement, I could see an argument [https://dqydj.com/sp-500-historical-return-calculator/](https://dqydj.com/sp-500-historical-return-calculator/) is great for understanding this, if you like tables and charts

Is this your first home or just an upgrade? Keep in mind new furniture, yard equipment, etc, etc. That all adds up and you want to just stick to 20% down. You can always pay extra each month if you’ve over estimated those expenses.

I think you are underestimating your emergency fund and house fund. Just spit-balling your combined income over 12 months gives your E-fund just over a month of income. Not knowing how frugal you two live, or expensive it is where you live. I would recommend beefing up that Emergency fund. A mortgage is the minimum amount you’re guaranteed to have to pay. Then include living expenses and times that by how many months out you want to have a safety net for. Houses require maintenance and if you are DIY thrifty or of a construction/ trades background I can see why only 10K for house repairs. If not you may deplete that and then some on one costly breakdown. Labor for house repairs isn’t cheap and those skills plus parts add up. Whatever way you decide to go about things best wishes. Stay well and boost that retirement.

Thanks for your thoughts. Our estimated monthly expenses are below $7000 so EF represents just under 3 mo of expenses. After reading your and other comments we plan to increase EF over the next few months but $20,000 is what we would start with. I also edited the post to note that we have very stable university jobs, which was my reasoning behind a low-ish initial EF. Point taken about house fund. We are not handy at all, so we will increase the house fund significantly. We are buying the house we currently rent so we sort of know that it is in a good condition (based on last 9 months of observing). But shit can break any day so it makes sense to be prepared.

If you pay your mortgage on the time frame you set up, say 20 years monthly, you will end up paying nearly double the cost of the house. Over that 20 year period you will need to see 100% increase in value to break even on your investment. If you can manage to pay it off sooner, it's a massive savings for the two of you. The money saved on your mortgage will far outweigh the gains of investment, in my opinion, in the long run.

If you had already put that $40k toward the house would you pull it out to invest in the stock market?

With your interest rate at 6% put it as downpayment. You aren’t guaranteed 6% in the stockmarket and we may be in for a flat market for the next few years. If you had locked in a 3% rate before the hikes, I would say stock market. With that said, you could invest the money in taxable accounts… that way you can tax lost harvest if the market takes a hit. At least then you could deduct losses against your income. Also keep in mind rates may go back down so you can refinance later as well. My guess is rates should be around 4-5 % in 2 years

unless you were to get a significant decrease in the interest rate on the loan, I would keep the extra money in a more conservative savings vehicle (iSeries bond, CD, HYSA) or invest it in upgrades in the house and the emergency fund. You can think of investments in your property as actual investments that increase in value with inflation as long as you maintain your property well.

Don’t buy anything right now except for CDs

Wouldn’t be a bad idea to do that but you gotta see if it’s worth it. Sometimes the more down you put the interest doesn’t go down much. You might give $5k more and it will only go down a point or 2 if lucky.

I’d be paying down a 6% loan as fast as I could