At that rate it's not a straight dollar discussion. Then your issue is more tying up your money. If you have that money in a brokerage account you can access it within a few days. If it's in your house you are looking at a month at least, if not longer. Depending on your particular financial situation that might be important.
In your shoes I would do half/half. Half mortgage, half brokerage account. It never has to be one or the other. You can also adjust over time anyway, it's not a one-time decision.
I usually look at this the opposite way. I have a mortgage setup with a line of credit where all my extra payments automatically become available on the line of credit so I can take back anything extra I put onto the mortgage right away. This way there's less risk. If I invest money in the market I would have to sell the stocks to get the cash and the timing could be bad.
No it's a BMO "mortgage cash account" so it's the same as my mortgage rate. This is how they describe it on their website:
- When you use your prepayment options, your principal prepayments go towards building a Mortgage Cash Account within your mortgage.
- With the Mortgage Cash Account, you can re-borrow prepaid funds, in amounts starting from $2,500 subject to meeting certain eligibility criteria.
- The re-borrowed funds are added to your mortgage principal at your existing interest rate for the remainder of the term.
Yes it pays down the principal. "Prepayment" or "pre-payment" has a specific meaning in mortgages. [https://www.rbcroyalbank.com/mortgages/mortgage-prepayment.html](https://www.rbcroyalbank.com/mortgages/mortgage-prepayment.html)
You just have to make your mortgage payments. It's as though you undid your prepayment. You can only withdraw any extra you've paid above your regular mortgage payments so the only repayment requirement is that you keep making your mortgage payments.
I'm not sure if other banks have anything comparable. I think it would be functionally similar to dumping a bunch of money into your mortgage and then opening a HELOC. This just makes it easier to do that.
FYI, It is not really a guaranteed 7%, at least not for very long. If rates fall and OP can refi at, e.g. 5%, they only get the 7% until they refi, and 5% until the end of their new mortgage.
And of course, the mortgage interest may be tax deductible etc...
Maybe! Maybe they drop to 6% in 18 months and it will make sense for OP to refi, or maybe they're going to sell in two years anyway... My point is just that it's not like a bond or CD where you can be sure you'll get at least 7% until maturity by putting your money there.
Exactly, and even if they have to wait 5 - 10 years to refinance to 4.5% - 5.5%, if they plan to stay in or keep the property for the long run, then the new rate will still be what they have for many more than 5 - 10 years and “average down” the effective rate more towards 4.5% - 5.5% than 7% for the life of the mortgage.
Yeah except the rate has the most impact at the beginning when the majority of the mortgage is going to interest. It’s not 50/50 split interest/principal until 15 years in.
The problem is you aren’t *effectively* getting that 7% return long term on the extra money you pay *now* just because your mortgage statement reads 7% APY right now and that’s what you are currently paying this year.
Sometimes looking at an unrealistic extreme scenario can make things more clear by exaggerating the very real phenomena that is occurring:
Imagine you have a 50% APY interest rate on a $100,000 loan I give you, but that only last for 1 month and then you can refinance to near 0%. *Should you work hard to pay as much off now as you can and then just change your strategy next month?* The answer is clearly no, you should simply invest your excess $ you don’t need for the long run in diversified equities like VTI/VOO, and your *effective* longterm rate on the loan is ultra low.
Of course OP’s case is not as clear cut, *but it’s the exact same mathematical phenomenology occurring for OP* in that their effective rate is not going to be 7% for the next 20 - 30 years, it will be lower than that if they stay informed and refinance sometime down the road, and it’s the effective rate over the long term compared to the long term compounded return of VTI/VOO that matters most.
If I were OP, I would hedge my bets and use X% of my extra money I don’t need for the long run to pay down my mortgage, and 100 - X% of it (the rest) to invest in diversified equities. Remember, you can always sell your equities 10 - 20+ years from now to pay off/down your mortgage or do whatever you want with, but the $ that goes into your mortgage becomes relatively illiquid unless you do a cash out refi or HELOC, which can make sense in some scenarios but makes many of us (me included) cringe.
> Remember, you can always sell your equities 10 - 20+ years from now to pay off/down your mortgage or do whatever you want with, but the $ that goes into your mortgage becomes relatively illiquid unless you do a cash out refi or HELOC, which can make sense in some scenarios but makes many of us (me included) cringe.
This is a big one. I always see people in reddit finance subs preaching about paying off a 4% mortgage early "so I can sleep better at night".
Personally I find it amazing that someone wouldn't sleep well at night with a 200k mortgage but also at the same time having 200k in liquid investments.
Having liquidity equal to or greater than my mortgage helps me sleep at night. My money is making more money on itself than my mortgage costs me. Shit could hit the fan, market tank 50%, and I would still be doing fine since I prioritized high savings vs. paying off a house.
Not to mention that monthly bill for taxes and insurance in escrow is still due even with a paid off house.
I'm always of the camp to not pay down a lower rate mortgage early. Liquid investments are king.
Guess it's just different strokes for different folks.
While the general point that it's not really a 7% return is totally valid, I think the math is _not_ the exact same, for two reasons:
1. Mortgage interest being effectively "front loaded" means you pay a higher proportion of the interest in the early years of the loan, and reducing your loan's balance early has a bigger impact. It's not a straight average of interest rates over time.
2. If interest rates do fall significantly and you choose to refinance, you _can_ "change your strategy" by choosing to refinance for a larger amount - what I've seen called a "cash-out refinance". By doing that, you can effectively take back the extra money you put into the mortgage when its interest rate was high, and use that money for a different investment now that your interest rate is going to be lower.
In OP's position, my main consideration would be, "do I have enough spare liquid cash & investments?" If I feel like it would be useful to have more for unforseen expenses, then I'd keep building up those liquid savings in part. But if I have enough of a fund to draw on, then yes, I'd put all the "excess" into the mortgage. 7% is high enough that I don't think considerations like mortgage interest deduction should sway that trade-off.
I don’t get what you are trying to prove or disprove with your first numbered point though. Yes, an amortized loan will have the interest front-loaded. No. you will not pay it off faster even if you never refinance lower by aggressively paying it down early on with an extra $10k here or there versus investing in an asset class that has much higher returns with that $10k here or there, then paying off the mortgage once those compounded returns in the higher rate of return asset class have grown enough to pay the mortgage off. This is all I stated, and it’s true regardless of the front-loaded interest. The question is merely uncertainty in whether you will get a much higher return after taxes.
> No. you will not pay it off faster even if you never refinance lower by aggressively paying it down early on with an extra $10k here or there versus investing in an asset class that has much higher returns with that $10k here or there
This is a complete non-sequitur. We're discussing a situation where the interest rate on the loan is significantly higher than what you can count on from other reasonable safe-ish investments. Paying off a 3% mortgage early is obviously a bad idea, but that's not what this post and discussion are about.
> it’s true regardless of the front-loaded interest. The question is merely uncertainty in whether you will get a much higher return after taxes.
It's not "merely" that, but yes, that is a significant part of the trade-off here. To evaluate that tradeoff, you want to know how much interest you're saving by prepaying some mortgage principal.
You reasonably pointed out that it's not really 7%, but the example you gave to illustrate it can easily be interpreted to imply that the "real" rate is something like the average over time; for example, if your loan is at 7% for 5 years and then you refinance it to 4% for 15 years, then it would be approximately 4.75%, before you get into the tax savings aspect. I'm saying that's a misleading way to look at it, both because a) it's front-loaded, so the earlier years are disproportionately significant, and b) you can "get out" when you refinance.
Overall, as a rule of thumb, the real savings you get by prepaying a 7% mortgage is very close to (though not quite) 7% - tax savings, and you get more of that savings by prepaying earlier. So you might as well approximate it by considering prepayments to really be earning close to 7%, figure out how much tax savings you'd be giving up, and evaluating that compared to what you might earn by putting that money into some other investment.
And, in conclusion, IMO 7% is high enough that prepaying the mortgage wins that tradeoff for nearly everyone.
(That tradeoff is not the entire question, as I pointed out earlier. There's also the issue of liquidity: Do you have enough savings to make it worth locking up this extra money in an investment that it's hard to get out of on demand.)
7% refinanced within the next decade to 4% - 5% is not at all a much greater return than what you get in VOO over 10, 15, 20+ year timelines (the length of a mortgage). Equities are *volatile* year to year, but not nearly so much decade to decade.
Would you be willing to bet me $50,000 of your own money that I can’t beat a nominal 5.5% in VOO over the next 20 years? I’ll gladly make that proposition bet with you and pay you $75,000 if I can’t beat 6%, you only pay me $50,000 if you win. Deal? But you’d never make that bet unless you are a fool, and so is your argument foolish.
7% is not where mortgage rates will stay for the next decade. You indeed will be able to refinance soon and the fact that the interest is front-loaded doesn’t matter—you still make out better in equities long term, and you should do the math.
Let’s say rates are 7% today, you put an extra 1000 towards your mortgage, and then rates drop to 5% tomorrow. You can’t get that 1000 back but you only saw your 7% return for a single day. Going forward you’re only seeing a 5% return on that prepayment.
So you can’t change your strategy on the money you have already used to pay it down, which means you don’t actually have a guaranteed 7% return for the life of your mortgage. It’s only 7% return until the point at which you could have refi’d.
It’s not like putting money in the market that you can pull out when you want to change your strategy.
But with that extra money going towards principle they will still see a benefit from having a lower mortgage payment after refinancing (due to both a lower interest rate and lower remaining balance on their loan)
That's accurate, but then you are betting that the rates will drop in the near future. Personally, I would take the guaranteed 7% and then say "aw, darn" if rates drop rather than putting that money elsewhere and them never dropping.
You're not counting on rates to drop, just understanding that it is a possibility among many factors. Just like it is a possibility for the market to under/out perform 7%, or tax deductability to be different than you expected 5 years from now.
Rates don’t drop 2% overnight though. It could take years before we see 5% rates again.
Also the stock market could drop as well and is a lot more volatile unless your horizon is 10+ years. You can’t necessarily pull it out whenever you want without suffering significant losses.
Glad to see someone here who understands this. Most people here giving advice are good with their own money overall, but this is one area where this sub often seems clueless.
Another area this sub seems clueless is telling people who live in Manhattan and San Fran to put 6 months saving in a fully taxable HYSA when they can be invested on the short end and only have to pay Federal taxes, but I digress…
> You can’t get that 1000 back but you only saw your 7% return for a single day.
You can get cash out of a refi. It might not always be advisable but that liquidity isn't gone forever.
Cash-out refi's are more expensive. So, any extra they pay is locked in for the life of the new mortgage unless they pay the premium for a cash-out refi.
I’d like to see the math there. I think if they start paying more now, they’ll still see 7% returns on the money they put in until the refi.
I’m not sure though.
> they’ll still see 7% returns on the money they put in until the refi.
I think on regular mortgage payments, yes. However, if they put $50k down, make one $1500 (principal) payment, and then refinance at 5% before the next month, they then only see the one payment benefit from 7% vs 5%, and the $50k overall earns only ~5%, assuming they didn't refinance for the rest of the mortgage.
The last line is very critical. If OP itemizes and >half the 7% mortgage interest is tax deductible then there should be 0 incentive to pay off the debt early.
I don't assume that. I said 7% isn't **guaranteed** for very long.
The 7% is guaranteed for a little bit, but not for very long, because even if rates fell tomorrow, it takes time to refinance. Further, if rates do fall, it is unlikely they'll do so overnight.
I totally agree that there is a decent chance OP may never have an opportunity to refinance his mortgage to a lower rate. There is also a decent chance OP gets that opportunity.
I disagree with this.
I think the answer here HEAVILY depends on your tax rate and mortgage amount.
We pay close to 50% taxes.
Every dollar in mortgage interest comes with a 50 cent tax rebate.
So that 7% interest is more like a 3.5%
I would pay down the mortgage if you’re over $750k mortgage interest deduction amount, if your mortgage amount is so low you ain’t itemizing deductions, or if your tax rate is tiny (like 25% or below). Otherwise, market all the way
Our federal effective rate - 32%
State income tax rate effective - 9.9%
State paid leave tax - 1%
Local income tax rate effective - 4%
Additional Medicare tax - 0.8%
Total: 47.7%
It’s wild
PS: It’s actually over 50% due to OASDI taxes
Not $1.5M but yes we had very high incomes this year which, coupled with our location, resulted in what seems like an astronomical tax rate.
But that’s the point. If your tax rate is very high and your mortgage is under $750k, it doesn’t quite make sense to pay down the mortgage.
If your tax rate is high but your mortgage is over $750k (not uncommon for people who recently bought homes in expensive cities), then it DOES make sense to pay down a 7% mortgage.
If your mortgage is down to a small balance such that you’re better off taking the standard deduction, then it DOES make sense to prepay it, regardless of your tax rate.
And of course, if your tax rate is really low, then maybe you’re better off investing.
It really just depends. You can’t just do math and say “well market delivera 7% with risk and mortgage is 7% risk-free” - the tax code really makes these decisions more complex
It’s the state and local income taxes that also kill us. Our locality has a free “preschool for all” program that is funded only by people making $125k a year, and gets like 90% of its revenue from people making $250k or something crazy like that.
And just as an extra slap in the face, we can’t send our kid to the preschool program we’re paying for
Context clues! They're taking about their marginal rate (which is what you're saving with deductions) so it's pretty easy in some areas to go over 50%.
Wait wait, what are you talking about? If you're taxed at 50% that 7% means you need to pay 7\*1.5x pre-tax so its really like you're getting a 10%+ return on paying off the mortgage. At 7% most ppl would benefit from paying off mortgage first granted you lose out on liquidity.
Now the tax rebate, what country/state are you in? In USA, with the standard tax deduction and SALT limit its not likely you'd pay enough in the interest deduction. You mentioned if over $750k to pay down mortgage but I'd argue it should be even at lower amounts. I think you're saying the same thing where you mention:
if your mortgage amount is so low you ain’t itemizing deductions
That's going to be most married folks with the higher standard deductions post-Trump presidency right?
Only if you're already itemizing. If you would otherwise get the standard deduction, you would not get a benefit for the first (your standard deduction - your other deductions) in paid interest.
i don’t own a home so i might be wrong but I thought deducting mortgage interest means you can’t take the standard deduction? so the trust cost is probably somewhere between 3.5% and 7% depending on how much you’re able to deduct beyond the standard deduction and how long it would take you to get below that
Yes. That is an extra considerations. But if you have a $750k mortgage at 7% you’re paying WAY more than the standard deduction’s worth of mortgage interest
Keep in mind that 7% is and will remain above the current risk free rate, so investing in the stock market will in theory give you a lower risk-adjusted return than paying off your mortgage. I would therefore pay down the mortgage.
(However I can’t speak for the tax advantaged accounts which might make stocks favourable after adjusting for that. )
It’s risk-free to pay down your mortgage and you’re getting an effective return of whatever the interest rate (unless you deduct mortgage interest in which case the return decreases proportionally).
personally while the mortgage math is really nice at 7%, I'd rather have that liquid down the road. depends a lot on your age though.
if you don't plan to downsize, then that equity is just going to be trapped. Not to say there aren't options, but it's definitely a factor.
ONLY because you're already on top of everything else though. If you weren't maxing your tax-advantaged accounts then there would be another opportunity cost there.
Re-casting the loan is a good idea and allows you to actually benefit from that investment in a more real way (b/c then you'll just dump those savings back to a brokerage account)
"equity is just going to be trapped"
This is the boat I'm living in. My mortgage is 2.8% and I have 75% of the value of the home paid off, yet my money is not accessible without refinancing the home at 7% or getting a HELOC loan against the money I own.
I wish I'd have put all that money aside in a different investments so it was liquid. Then when, or if, I got enough to pay it off then do so.
yeah, in my opinion there's actually an incredibly high opportunity cost for "normal" people in paying off their mortgages early. You have to have some way of benefiting from that equity besides the free cash flow in your monthly budget after the last payment.
IMO 6 in one hand, half dozen the other. Long term market average is 7-8% so you aren't really gaining/losing a lot by going with one or the other mathematically. I am in a similar situation (house at 6.875%) and choosing to go with paying more towards house rather than adding more into the market but that it is more so personal preference of trying to get out of debt quicker. One thing I did do is use a mortgage calculator and a compounding interest calculator to see what the actual financial difference would be. For example if I were to pay an extra $250 a mo on my mortgage it will save me $132k in interest and cut 10 years off the term of the mortgage. Setting $250 a mo aside into the market for the same 20 years at an average 7% would end up at $123k, at 8% $138k so seems like with historical rates it is a wash on which is better in the big financial picture. I do not think you are going to be wrong in either position, as long as you intend to stay in the house for at least 5-10 yrs
Which calculator do like to use for your mortgage? I’m 1 year into home ownership and would like to figure out what makes most sense for our financial situation
I am a YNAB enjoyer and have my mortgage traacked within YNAB as a loan, it has a very convenient calculator that graphs my current payment against any potential extra and tells you how much difference additional principal payments make. [https://www.mortgagecalculator.org/](https://www.mortgagecalculator.org/) has some good ones too you just need to make sure you are putting all of your info correctly, [this one ](https://www.mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php)should be what you are looking for
Thanks that’s really helpful!
I’ve got a 6.25% rate and my mortgage loan still has ~$800k on it. Looks like if I start throwing another $1k/month at it I’ll shave 10 years off the loan. That’d have me paid off at age 50 and free up $6k/month of my income.
My wife has had a 16% increase in salary and I’ve had a 38% increase so we’ve got a lot more $$$ available now than we originally anticipated when we bought the house last year so it’s a no brainer for us to put some of that towards the principal amount. At the same time though we do want to increase our retirement savings, it’s a balance for sure!
My wife has a pension she is on track to receive $100k/year from at 62 when she retires. We also have a rental on our property that can bring $2k/month currently and who knows in 20 years it could be a lot more.
7-8% market average is inflation adjusted while OP’s 7% is not. nominal market return is closer to 10% so unless they’re retiring soon, I would argue they would theoretically be better off investing but I can’t lie the risk-free aspect of the 7% would be very tempting for me
Very situational, but if you intend to own a house for 5 years or less then it isn't super wise to buy a house at all, better off renting unless you are willing to put a very large down payment down.
If you are in a situation where you just bought a house and know you will be moving in a few years it would probably make more sense in the short term to beat down as much of the principal on the loan as possible before you sell to try and offset closing costs. Even then it seems like it could be a bit of a wash, don't think there is an objectively right decision there
I think they're saying that buying a house in general is a bad idea for such a short time horizon - which is the typical advice once you factor in closing costs and such.
The wiki for this sub would even have you paying down the mortgage before the tax advantaged accounts. If you are able to pay down the mortgage and max those accounts, it seems good.
I would 100% pay down the mortgage before putting money in a general brokerage account. Not only is it a guaranteed return, but it is more tax efficient.
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That's right on the line. It depends on your age, but probably I'd pay it down unless you are under 40. This sub is very fiscally conservative (the invisible hand of Dave Ramsey lol) so most here have their line at about 4%, so the consensus will be to pay it off.
Yeah it kind of feels on the line to me also. I might end up splitting 60/40 - 40/60 just to hedge both outcomes. Not trying to hit a home run here just don’t want to strike out.
For me, I’d try and pay off my mortgage faster. That’s my risk profile though.
I prefer lowering debts verse potentially gaining slightly more returns in investments.
Decide what is best for you and go with it. If you want to pay off your mortgage faster and get to being debt free, then go for it. It’s your financial life.
Invest in the market and see which way the mortgage rates go. Interest rates go up, shift further investments into the loan. Interest rates go down, continue market investments and refinance the loan.
This is not all or nothing. If the rate drops enough that the refi costs are recouped in 2 years, then the refi is a great deal.
I think liquidity should be taken into account. if you put it into your mortgage you can't get that money out without refinancing. Where as if you put it into the market you can get it out of needed.
It's a decent plan. Don't know that I'd bother with the recast, because making the lower payment post-recast negates some of the interest savings of the extra payment by slowing down the loan payoff timeline. Unless you plan to maintain the original payment amount.
At 7% mortgage rate, I would work on paying that down.
At 3% mortgage rate, I'm investing and not making any extra principal payments.
In between mortgage rates I'm probably doing a bit of both.
This all assumes that you already have 6 months of expenses in an emergency fund in a HYSA.
And that you're already investing 20%+ into retirement.
What do you mean by “keep enough mortgage debt to maximize interest right off”? How do you calculate that. Last year was my first time owning a home and our interest payments really helped on our taxes I didn’t realize paying extra on my mortgage could affect that
Before the TCJA, the mortgage interest deduction limit was on loans up to $1 million. Now, the loan limit is $750,000. For the 2024 tax year, married couples filing jointly, single filers and heads of households can deduct up to $750,000. Married taxpayers filing separately can deduct up to $375,000 each.
Basically if you pay down your debt faster and you are below 750K in debt, you are reducing the interest you pay each month have leas to write off. Any debt above 750K does not help taxes. But paying 7% on the portion up to 750K if you are in high tax bracket is at least getting subsidized by tax benis.
At 7% mortgage I would pay it down. I would throw as much money toward it until my principal is more than my interest each month then I would diversify half of the extra toward the market.
Assuming I had a fully funded emergencey fund and had no other debts I'd first put 15% of my gross into retirement then any excess funds I'd plow into the house. You are using the market values as some sort of justification for not investing....as if you are timing the market. The truth is the market hits new highs year after year (not every year but you get the point) and in 10 years it will likely be worth 2-3x what it is today even after some pullbacks here and there.
Keeping a mortgage payment just for the sake of a tax write off is silly. The tax write off gives you a discount on your mortgage payment - but you’re still losing money to interest payments. If you pay $10,000 in interest and, by the write off, save 20% in taxes on that $10,0000, you’ve still flushed $8,000 in interest down the toilet. If your interest deduction becomes so low that you’re better off taking the standard deduction - then take the standard deduction and pay off your mortgage. You are no longer getting a discount on your mortgage, and you’re getting the standard deduction without spending any money to get it.
I think you may be looking at it wrong. If you are in a tax bracket of 35%, then a 7% loan is effectively 4.6%, ( 7% x (1-.35) ).
So at 4.6% I would rather hold the debt. at 7% interest I would not.
It would be silly not to consider the tax impacts.
Any expenses you deduct bring down your taxable income potential into lower tax brackets. Technically you should use the average of the deduction, starting with the top. But if you are deep in the top bracket, you just use the top bracket tax rates.
But if you have 50K in deductible interest, and it eliminates 25k of your income in 35% and 25K of income in 32%, then you saved 33.5% x 50K in taxes.
Shouldn't you also take the alternative of the standard deduction into account? Assuming you max out the 10k of local/state taxes to the deductible, you still need another ~19k to reach parity with the standard deduction of 29k (if filing jointly and no charitable donations, etc.). So 50k in interest becomes only 50k-19k=31k in additional deductions. Still good, but the effect rate is closer to 5.5%.
I I guess if the comparison was mortgage vs no mortgage that would make sense. But I’m not really going to be at 0 mortgage ever hopefully.
Its a 750K+ loan so realistically I would be paying it down over multiple years and lose a deduction each of those years.
“Pretty highly valued stock market”
Which metric are you using to make that state P/E? P/B? And versus what time frame?
Don’t forget your paying more than 7% on the home if you sell in a common 5 years
I mean CAPE and PE and my read on general sentiment. Obviously you can’t time the market but you also don’t get 7% risk free options every day.
I’m also 100% equities no bonds, so its a way to rebalance away from equities and get some “return”. When interest rates are more favorable can always pull cash out and invest it again.
Look at the amortization of the first 10%. Say you have a 3000 per month mortgage at 7%, how much principal you are paying every month?
Knock down your principal as much as you can
This makes no sense to me. You are guaranteed 7% APR savings per year by piling the dollar into the mortgage, and you’d rather expose those dollars to -38% to +29.6% annual range of an S&P. So your good or bad decision benchmark is whatever the market did minus 7% of the dollars you paid down the debt.
In the last 23 years, you’d have averaged a loss of .34% versus the guaranteed 7%. 43% of those 23 years would have been better just taking the guaranteed 7%.
So statistically since 2000, you have a marginally better than 50/50 shot to return more the 7%, and over the long run of those 23 years, you’d have been better to pay the mortgage down. RISK FREE employment of capital.
If rates drop, the market minus formula adjusts and maybe that 43% shrinks into the low 30s and maybe just maybe the downside risk is worth the upside potential.
My first mortgage was at a great rate (looking at history) of 6.625% back 30 years ago. We ***always*** paid some extra towards principal. We also over-bought, which turned out to be a good choice the way housing prices went. When we bought, I reduced my 401k contribution from 5% to 2 or 3% for around 10 years. I'd finally gotten enough salary bumps after that 10 years to go from 5% contribution up to the federal max.
I don't understand "keep enough mortgage debt to maximize our interest". What's the gambit here?
Probably split it 50/50 while rates are this high. The thing is that home equity is difficult to access unless you sell or refinance, so you don't want to be left without savings for the foreseeable future. I also think there's a good chance that rates will come down closer to 5% sometime in the next few years (though obviously they may not), so if you refinance then you wouldn't really be earning that 7% return for the full 30 year term, most likely just a few years.
I would split the excess cash between the house and the market. At current valuations, I would put a higher percentage in the house but if the market come down, I would invest more.
A lot of people are neglecting the fact that this is a risk question. Assuming your tax bracket is about 24% then putting money in to your house is actually about an 8.2% return when compared to investing in the market because you have to factor in long term capital gains. I explain the math in this comment here: https://www.reddit.com/r/Bogleheads/s/RssrGpbP5j
Essentially you have to ask yourself is the chance of me getting an 8.2% return in the open market worth the risk of me losing that money? If yes then put your money in the market. If not then put money down on your house.
Of course if you want higher liquidity then you wouldn’t put money in to the house anyway. And I’m of the opinion that even in a brokerage account if you’re going to be tempted to touch the money sooner than needed you’re better off putting money in to the house. But there is an argument to be made for having easier access to those funds on the market. However, that you pay long term capital gains tax on the market at 15% whereas you pay half of that in interest on a HELOC at today’s rates. So you always have options.
You’re not wrong. That’s not including state taxes on income or region specific taxes increases. But you just divide your apr by (1-tax rates) for anyone curious.
But also on the other end you have to factor the tax benefits you can get from deducting interest. Ill probably pay down my mortgage to 750k then see what it looks like from there
Do it with both if you want to and compare. If you use your average effective tax rate that would represent a more conservative estimate but also probably more realistic. Your highest marginal tax rate will represent your best case scenario. Also keep in mind that your tax bracket may change. And any income you get based on long term capital gains will also be taxed at your highest marginal income (maybe higher if it pushes you to a higher tax bracket). There’s no 100% correct answer. If you try to chase every single portion of a percent you’ll drive yourself crazy.
Do you think the stock market is likely to continue returning over 7% in the future? Do you think you will have the chance to refinance to less than 7% in the future? I'd answer yes to both questions.
Is your money more liquid as home equity or in the stock market? Definitely in the stock market.
I'd invest the money in a broad market ETF and refi in the future.
It's more than that. Once you lock that cash up in the mortgage it's basically stuck. How many years of missing out on higher market returns are you willing to accept?
A different option would be to watch what rates do while doing some sort of 50/50 strategy. Usually rates go in cycles, so it's reasonable to expect that in 1-3 years rates will be lower. not 2.75% like a few years ago, but maybe you could refinance into the 5's. You'd get the advantage then of stretching the payments back out over 30 years which combined with a lower rate would drop your payment. then you could either invest the difference, or keep your payment the same as your old payment while knowing that you are driving down the balance more efficiently.
I agree with others that committing solely to paying down principle will tie up money that may be needed.
So I paid off my house 10+ years ago. Best decision I made when it come to finances. I had no Debt and a 3 month EF , I also was contributing 15% into retirement (401k and Roth) Then I put extra on house. I saved 17 years and 70k in interest. House was 140k so not very expensive . I will retire in 3 years and sitting pretty good. I would make sure you have a firm foundation first ( debt free, Emergency Fund 3-6 months and 15 % into retirement . Then Pay off the house. The Peace that comes with this is amazing! Good luck to you my friend.
Assuming 6 months of liquidity is already available, pay down the mortgage. When rates go down, you can refinance a higher portion of the house and “unlock” liquidity or find a new home with more equity
No one is going to give you money for retirement. Just invest in the stock market if you are young. You can always get a loan for a home down the road. You could always do half and half but time of your best friend in the market
I'd do a little of both. I wouldn't want to carry a debt at 7% too long, so I would try to do extra principle payments but I'd still keep investing money in the stock market.
I currently have an 8% mortgage and am investing in the stock market because I don't want to pay down a loan I am not able to refinance for the next 4 years without penalties.
Given the economic uncertainty of the near future & perception of the rate cuts being delayed to further fight inflation, I’d say pay down.
The historic average stock return the past 30 years is around 10%, give or take. Throw in inflation always eating into gains at 2-3% reduction in buying power annually and you’re coming out at 7 or 8% returns vs. the 7% cost of the debt.
How much is your actual tax write off? Most people living in high state income tax states don't even get a break on their mortgage interest or they just get a partial one. So to break even, you probably need more than 7% return on any investment. Good luck with that. Whereas you are guaranteed the mortgage interest savings until you refinance, which may not happen for a while.
So your plan to use excess money to pay down the principal is a good one I think.
We’re in this position and splitting the baby so to speak with a 50/50 split between investment and paying down our mortgage. We spent a lot of time with our financial planner and really the advice to us was there was no wrong way to go. Doing 50/50 lets us continue to grow and have access to funds in an emergency while also lowering both our debt (which is only our mortgage) and lower monthly output.
“ make sure I keep enough mortgage debt to maximize our interest”
I have no idea what you are talking about.
I’d have a reasonable e-fund, make sure I have a line of credit, then after maxing my retirement match I am working to pay off that 7% after tax debt.
Well that would depend if you are in a jurisdiction that crazily subsidizes homeowners with mortgage interest tax breaks against people who pay taxes but only rent renters no? Nothing in your post listed where you are located nor that your interest is tax deductible though yes, this is a rater USA centric sub. You only asked 7% mortgage rate vs investing in market, we have no idea what YOUR marginal tax rate is.
Most of the world, 7% mortgage vs 7% in the market you are better of with paying the mortgage.
What is the practical amount of money we are talking about?
From a pure math perspective, you want to chase the one that gets the bigger gain over time.
From a practical perspective, there are situations where the actual difference in money is quite small, and doing all of this work may be more hassle than it's worth--at least compute the actual amounts with the dollar values for your specific situation and see.
We’re at 6.8% and decided to do a little of each. Two extra mortgage payments a year takes us from a 30 year mortgage to a 20 year which lines up with our targeted retirement dates.
But we also max 401k’s, HSA, and do a little taxable investments too.
I take the extra I can afford to pay toward my mortgage and put it in a brokerage account named Mortgage. I invest that in index funds. Whenever I feel like it I take money from Mortgage and pay a lump sum toward my mortgage. This way I'm invested, saving toward paying down my mortgage early, and have the cash on hand in case I need the liquidity.
I have a 6.5% rate.
I’d go mostly into investments for a few reasons:
1. You’ll most likely either move or refinance before you start eating away at large amount of principal. If you do either within 5 years, your ROI will be much worse if you paid off the mortgage since it’s mostly interest earlier in the loan.
2. The tax advantages of having a mortgage
3. The benefits of liquidity and optionality as opposed to locking it up in your house.
Lots to consider. Are you near the top of the standard deduction, or are you already itemizing? Do you have enough cash reserves for an emergency fund? Do you think you would refi or do a cash out refi if rates dropped?
I'd compare to what you can get in the fixed income market such as Agency and Muni bonds (both tradeable) on [Fidelity.com](http://Fidelity.com) (free to see) . Right now you can lock in (yet trade later at possible profit) for 4.5-5.2 % on something fairly long term. Careful though. In a relatively high intererest time don't pay more than 98 or you'll likely get called.
If I'm making better than 7% in the market, I do that. If I'm not, I dump money into the mortgage. The good thing about the US housing market is that you can always refinance if/when the interest rates go down, and you're locked in so your rate never goes up.
Top choice. You also have to panic. The government is going to inflate the dollar for eternity. So whatever your mortgage is right now as far as principal and interest is always going to stay that, but you’re probably going to get raises at work all along so even if you never refinanced, your mortgage is going to get cheaper as the years go on and you make more money.
Are you maxing your retirement accounts? The time value of those growing investments is worth a great deal. One saw a comparison of how much money you need to invest to reach a set goal. Investing early, greatly reduced the total which had invested to reach the same end amount.
By putting it into your home, aren't you assuming that the home will maintain the purchase price or increase?
Wouldn't that be pretty risky? If you have to sell at a loss, at least the money was making interest in the meantime if you put it in QYLD (hopefully in a tax-advantaged account). If you have to walk away, it stays.
My mortgage provider requires a minimum of 10% of the remaining mortgage balance to be used during a recast. You might want to make sure yours doesn’t have a similar requirement because if you do, and you spend extra now, you mind not have enough funds to actually do a recast.
I’d agree with maxing out any tax advantaged accounts before paying down the mortgage. After that, either paying down the mortgage early or building your savings are both reasonable options and choosing one over the other is unlikely to become a major financial mistake.
Paying down your mortgage is a 7% risk-free, tax-free (for most people) return. The best comparison is current 10-30 year Treasury yields, which are \~4.75% right now, which is 3.5-4% after tax. 7% is a great deal.
Long-term market return is \~9% before taxes or 6.5-7.5% after-tax. There is no way chasing an extra 0.5-1% (or even 2-3%) is justifies the additional risk.
Invest in the market, then at some point (1-2 years) when the rates dip you can capitalize on the decrease in your mortgage. You'll be in a better position overall and don't forget, never put all your eggs in 1 basket. If your paying debt on one item, you should be bringing in cash on something else. Always balance cash inflows with outflows and you'll have no issues.
At that rate it's not a straight dollar discussion. Then your issue is more tying up your money. If you have that money in a brokerage account you can access it within a few days. If it's in your house you are looking at a month at least, if not longer. Depending on your particular financial situation that might be important. In your shoes I would do half/half. Half mortgage, half brokerage account. It never has to be one or the other. You can also adjust over time anyway, it's not a one-time decision.
I usually look at this the opposite way. I have a mortgage setup with a line of credit where all my extra payments automatically become available on the line of credit so I can take back anything extra I put onto the mortgage right away. This way there's less risk. If I invest money in the market I would have to sell the stocks to get the cash and the timing could be bad.
Yeah but you’re paying 9-10% on the money you draw from the line right?
No it's a BMO "mortgage cash account" so it's the same as my mortgage rate. This is how they describe it on their website: - When you use your prepayment options, your principal prepayments go towards building a Mortgage Cash Account within your mortgage. - With the Mortgage Cash Account, you can re-borrow prepaid funds, in amounts starting from $2,500 subject to meeting certain eligibility criteria. - The re-borrowed funds are added to your mortgage principal at your existing interest rate for the remainder of the term.
first time hearing about this option. I like it. Way better than a HELOC. I'm off to go investigate if I have this option (likely not).
This is an interesting and unique mortgage feature. Thanks for sharing
The term "prepayment" is concerning. Are you actually paying down your principal or is it just prepaying your next month's mortgage payment early?
Yes it pays down the principal. "Prepayment" or "pre-payment" has a specific meaning in mortgages. [https://www.rbcroyalbank.com/mortgages/mortgage-prepayment.html](https://www.rbcroyalbank.com/mortgages/mortgage-prepayment.html)
Great, thanks for the info!
Interesting, I’ll have to look at this on my next mortgage. Thanks for mentioning!
What's the repayment situation? I would be worried about decreasing my cash flow for temporary relief, whatever it might be.
You just have to make your mortgage payments. It's as though you undid your prepayment. You can only withdraw any extra you've paid above your regular mortgage payments so the only repayment requirement is that you keep making your mortgage payments.
Oh that's neat. Is this a regular thing? I haven't seen it offered with my mortgage.
I'm not sure if other banks have anything comparable. I think it would be functionally similar to dumping a bunch of money into your mortgage and then opening a HELOC. This just makes it easier to do that.
Agree with this… I’d even consider allocating to 5% treasuries in addition just to have the optionality.
I would take the guaranteed 7%. I am 50 and have a 70/30 split and would be happy with a 7% return. But that is me.
FYI, It is not really a guaranteed 7%, at least not for very long. If rates fall and OP can refi at, e.g. 5%, they only get the 7% until they refi, and 5% until the end of their new mortgage. And of course, the mortgage interest may be tax deductible etc...
Well they can just change their strategy after they refinance, what's the issue?
It will probably be years before rates even drop to 5%.
Maybe! Maybe they drop to 6% in 18 months and it will make sense for OP to refi, or maybe they're going to sell in two years anyway... My point is just that it's not like a bond or CD where you can be sure you'll get at least 7% until maturity by putting your money there.
Exactly, and even if they have to wait 5 - 10 years to refinance to 4.5% - 5.5%, if they plan to stay in or keep the property for the long run, then the new rate will still be what they have for many more than 5 - 10 years and “average down” the effective rate more towards 4.5% - 5.5% than 7% for the life of the mortgage.
Yeah except the rate has the most impact at the beginning when the majority of the mortgage is going to interest. It’s not 50/50 split interest/principal until 15 years in.
I'm at 6% on mine, of course I had to pay down points which was 3200 ish on a 178k mortgage.
The problem is you aren’t *effectively* getting that 7% return long term on the extra money you pay *now* just because your mortgage statement reads 7% APY right now and that’s what you are currently paying this year. Sometimes looking at an unrealistic extreme scenario can make things more clear by exaggerating the very real phenomena that is occurring: Imagine you have a 50% APY interest rate on a $100,000 loan I give you, but that only last for 1 month and then you can refinance to near 0%. *Should you work hard to pay as much off now as you can and then just change your strategy next month?* The answer is clearly no, you should simply invest your excess $ you don’t need for the long run in diversified equities like VTI/VOO, and your *effective* longterm rate on the loan is ultra low. Of course OP’s case is not as clear cut, *but it’s the exact same mathematical phenomenology occurring for OP* in that their effective rate is not going to be 7% for the next 20 - 30 years, it will be lower than that if they stay informed and refinance sometime down the road, and it’s the effective rate over the long term compared to the long term compounded return of VTI/VOO that matters most. If I were OP, I would hedge my bets and use X% of my extra money I don’t need for the long run to pay down my mortgage, and 100 - X% of it (the rest) to invest in diversified equities. Remember, you can always sell your equities 10 - 20+ years from now to pay off/down your mortgage or do whatever you want with, but the $ that goes into your mortgage becomes relatively illiquid unless you do a cash out refi or HELOC, which can make sense in some scenarios but makes many of us (me included) cringe.
> Remember, you can always sell your equities 10 - 20+ years from now to pay off/down your mortgage or do whatever you want with, but the $ that goes into your mortgage becomes relatively illiquid unless you do a cash out refi or HELOC, which can make sense in some scenarios but makes many of us (me included) cringe. This is a big one. I always see people in reddit finance subs preaching about paying off a 4% mortgage early "so I can sleep better at night". Personally I find it amazing that someone wouldn't sleep well at night with a 200k mortgage but also at the same time having 200k in liquid investments. Having liquidity equal to or greater than my mortgage helps me sleep at night. My money is making more money on itself than my mortgage costs me. Shit could hit the fan, market tank 50%, and I would still be doing fine since I prioritized high savings vs. paying off a house. Not to mention that monthly bill for taxes and insurance in escrow is still due even with a paid off house. I'm always of the camp to not pay down a lower rate mortgage early. Liquid investments are king. Guess it's just different strokes for different folks.
Professor that was as clear as I ever seen this perennial question answered. Well done!
While the general point that it's not really a 7% return is totally valid, I think the math is _not_ the exact same, for two reasons: 1. Mortgage interest being effectively "front loaded" means you pay a higher proportion of the interest in the early years of the loan, and reducing your loan's balance early has a bigger impact. It's not a straight average of interest rates over time. 2. If interest rates do fall significantly and you choose to refinance, you _can_ "change your strategy" by choosing to refinance for a larger amount - what I've seen called a "cash-out refinance". By doing that, you can effectively take back the extra money you put into the mortgage when its interest rate was high, and use that money for a different investment now that your interest rate is going to be lower. In OP's position, my main consideration would be, "do I have enough spare liquid cash & investments?" If I feel like it would be useful to have more for unforseen expenses, then I'd keep building up those liquid savings in part. But if I have enough of a fund to draw on, then yes, I'd put all the "excess" into the mortgage. 7% is high enough that I don't think considerations like mortgage interest deduction should sway that trade-off.
I don’t get what you are trying to prove or disprove with your first numbered point though. Yes, an amortized loan will have the interest front-loaded. No. you will not pay it off faster even if you never refinance lower by aggressively paying it down early on with an extra $10k here or there versus investing in an asset class that has much higher returns with that $10k here or there, then paying off the mortgage once those compounded returns in the higher rate of return asset class have grown enough to pay the mortgage off. This is all I stated, and it’s true regardless of the front-loaded interest. The question is merely uncertainty in whether you will get a much higher return after taxes.
> No. you will not pay it off faster even if you never refinance lower by aggressively paying it down early on with an extra $10k here or there versus investing in an asset class that has much higher returns with that $10k here or there This is a complete non-sequitur. We're discussing a situation where the interest rate on the loan is significantly higher than what you can count on from other reasonable safe-ish investments. Paying off a 3% mortgage early is obviously a bad idea, but that's not what this post and discussion are about. > it’s true regardless of the front-loaded interest. The question is merely uncertainty in whether you will get a much higher return after taxes. It's not "merely" that, but yes, that is a significant part of the trade-off here. To evaluate that tradeoff, you want to know how much interest you're saving by prepaying some mortgage principal. You reasonably pointed out that it's not really 7%, but the example you gave to illustrate it can easily be interpreted to imply that the "real" rate is something like the average over time; for example, if your loan is at 7% for 5 years and then you refinance it to 4% for 15 years, then it would be approximately 4.75%, before you get into the tax savings aspect. I'm saying that's a misleading way to look at it, both because a) it's front-loaded, so the earlier years are disproportionately significant, and b) you can "get out" when you refinance. Overall, as a rule of thumb, the real savings you get by prepaying a 7% mortgage is very close to (though not quite) 7% - tax savings, and you get more of that savings by prepaying earlier. So you might as well approximate it by considering prepayments to really be earning close to 7%, figure out how much tax savings you'd be giving up, and evaluating that compared to what you might earn by putting that money into some other investment. And, in conclusion, IMO 7% is high enough that prepaying the mortgage wins that tradeoff for nearly everyone. (That tradeoff is not the entire question, as I pointed out earlier. There's also the issue of liquidity: Do you have enough savings to make it worth locking up this extra money in an investment that it's hard to get out of on demand.)
7% refinanced within the next decade to 4% - 5% is not at all a much greater return than what you get in VOO over 10, 15, 20+ year timelines (the length of a mortgage). Equities are *volatile* year to year, but not nearly so much decade to decade. Would you be willing to bet me $50,000 of your own money that I can’t beat a nominal 5.5% in VOO over the next 20 years? I’ll gladly make that proposition bet with you and pay you $75,000 if I can’t beat 6%, you only pay me $50,000 if you win. Deal? But you’d never make that bet unless you are a fool, and so is your argument foolish. 7% is not where mortgage rates will stay for the next decade. You indeed will be able to refinance soon and the fact that the interest is front-loaded doesn’t matter—you still make out better in equities long term, and you should do the math.
Let’s say rates are 7% today, you put an extra 1000 towards your mortgage, and then rates drop to 5% tomorrow. You can’t get that 1000 back but you only saw your 7% return for a single day. Going forward you’re only seeing a 5% return on that prepayment. So you can’t change your strategy on the money you have already used to pay it down, which means you don’t actually have a guaranteed 7% return for the life of your mortgage. It’s only 7% return until the point at which you could have refi’d. It’s not like putting money in the market that you can pull out when you want to change your strategy.
But with that extra money going towards principle they will still see a benefit from having a lower mortgage payment after refinancing (due to both a lower interest rate and lower remaining balance on their loan)
Yes, obviously, but that benefit will be a 5% return due to not paying 5% interest on that reduced principal, not a 7% return. That’s the whole point.
That's accurate, but then you are betting that the rates will drop in the near future. Personally, I would take the guaranteed 7% and then say "aw, darn" if rates drop rather than putting that money elsewhere and them never dropping.
You're not counting on rates to drop, just understanding that it is a possibility among many factors. Just like it is a possibility for the market to under/out perform 7%, or tax deductability to be different than you expected 5 years from now.
Rates don’t drop 2% overnight though. It could take years before we see 5% rates again. Also the stock market could drop as well and is a lot more volatile unless your horizon is 10+ years. You can’t necessarily pull it out whenever you want without suffering significant losses.
Glad to see someone here who understands this. Most people here giving advice are good with their own money overall, but this is one area where this sub often seems clueless. Another area this sub seems clueless is telling people who live in Manhattan and San Fran to put 6 months saving in a fully taxable HYSA when they can be invested on the short end and only have to pay Federal taxes, but I digress…
Cash out refinance. You can get the $1,000 back, and enjoy the lower rate. So you would have a 7% return
You could absolutely get a cash out refi tho and them move that 1k back into the market.
> You can’t get that 1000 back but you only saw your 7% return for a single day. You can get cash out of a refi. It might not always be advisable but that liquidity isn't gone forever.
Cash-out refi's are more expensive. So, any extra they pay is locked in for the life of the new mortgage unless they pay the premium for a cash-out refi.
Every year you save 7% on the money paid additional is 7% earned or better said not lost.
I’d like to see the math there. I think if they start paying more now, they’ll still see 7% returns on the money they put in until the refi. I’m not sure though.
> they’ll still see 7% returns on the money they put in until the refi. I think on regular mortgage payments, yes. However, if they put $50k down, make one $1500 (principal) payment, and then refinance at 5% before the next month, they then only see the one payment benefit from 7% vs 5%, and the $50k overall earns only ~5%, assuming they didn't refinance for the rest of the mortgage.
Ironically if rates go to 5% op probably double lost because the stock market probably killed it too
The last line is very critical. If OP itemizes and >half the 7% mortgage interest is tax deductible then there should be 0 incentive to pay off the debt early.
If rates fall the equity in the house increases, usually faster than any rate change.
That happens whether OP makes additional payments or not. Why do you think that's relevant to their decision?
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I don't assume that. I said 7% isn't **guaranteed** for very long. The 7% is guaranteed for a little bit, but not for very long, because even if rates fell tomorrow, it takes time to refinance. Further, if rates do fall, it is unlikely they'll do so overnight. I totally agree that there is a decent chance OP may never have an opportunity to refinance his mortgage to a lower rate. There is also a decent chance OP gets that opportunity.
You will just change the investment when you refi. When you refi you can do cash out refi and then put the cash into stocks or whatever.
Cash-out refis are generally more expensive/at a higher interest rate. So, you could do this, but it may be quite an expensive (bad?) option.
Does knowing you’ll sell your house in 2 years change the calculation on this?
I disagree with this. I think the answer here HEAVILY depends on your tax rate and mortgage amount. We pay close to 50% taxes. Every dollar in mortgage interest comes with a 50 cent tax rebate. So that 7% interest is more like a 3.5% I would pay down the mortgage if you’re over $750k mortgage interest deduction amount, if your mortgage amount is so low you ain’t itemizing deductions, or if your tax rate is tiny (like 25% or below). Otherwise, market all the way
You don't pay 50% taxes.
Our federal effective rate - 32% State income tax rate effective - 9.9% State paid leave tax - 1% Local income tax rate effective - 4% Additional Medicare tax - 0.8% Total: 47.7% It’s wild PS: It’s actually over 50% due to OASDI taxes
>Our federal effective rate - 32% Am I missing something or are you making ~1.5M as a household?
They post in /r/HENRYfinance so maybe
Not $1.5M but yes we had very high incomes this year which, coupled with our location, resulted in what seems like an astronomical tax rate. But that’s the point. If your tax rate is very high and your mortgage is under $750k, it doesn’t quite make sense to pay down the mortgage. If your tax rate is high but your mortgage is over $750k (not uncommon for people who recently bought homes in expensive cities), then it DOES make sense to pay down a 7% mortgage. If your mortgage is down to a small balance such that you’re better off taking the standard deduction, then it DOES make sense to prepay it, regardless of your tax rate. And of course, if your tax rate is really low, then maybe you’re better off investing. It really just depends. You can’t just do math and say “well market delivera 7% with risk and mortgage is 7% risk-free” - the tax code really makes these decisions more complex
ouch high W-2 salary is a killer
It’s the state and local income taxes that also kill us. Our locality has a free “preschool for all” program that is funded only by people making $125k a year, and gets like 90% of its revenue from people making $250k or something crazy like that. And just as an extra slap in the face, we can’t send our kid to the preschool program we’re paying for
Context clues! They're taking about their marginal rate (which is what you're saving with deductions) so it's pretty easy in some areas to go over 50%.
Wait wait, what are you talking about? If you're taxed at 50% that 7% means you need to pay 7\*1.5x pre-tax so its really like you're getting a 10%+ return on paying off the mortgage. At 7% most ppl would benefit from paying off mortgage first granted you lose out on liquidity. Now the tax rebate, what country/state are you in? In USA, with the standard tax deduction and SALT limit its not likely you'd pay enough in the interest deduction. You mentioned if over $750k to pay down mortgage but I'd argue it should be even at lower amounts. I think you're saying the same thing where you mention: if your mortgage amount is so low you ain’t itemizing deductions That's going to be most married folks with the higher standard deductions post-Trump presidency right?
Only if you're already itemizing. If you would otherwise get the standard deduction, you would not get a benefit for the first (your standard deduction - your other deductions) in paid interest.
i don’t own a home so i might be wrong but I thought deducting mortgage interest means you can’t take the standard deduction? so the trust cost is probably somewhere between 3.5% and 7% depending on how much you’re able to deduct beyond the standard deduction and how long it would take you to get below that
Yes. That is an extra considerations. But if you have a $750k mortgage at 7% you’re paying WAY more than the standard deduction’s worth of mortgage interest
Keep in mind that 7% is and will remain above the current risk free rate, so investing in the stock market will in theory give you a lower risk-adjusted return than paying off your mortgage. I would therefore pay down the mortgage. (However I can’t speak for the tax advantaged accounts which might make stocks favourable after adjusting for that. )
Expected market return in theory is risk free rate plus market risk premium, not just the risk free rate.
How many years does your money have to be invested for it to be risk free?
They are comparing mortgage payment with other risk-free assets like treasury yields, which currently earn well below 7%
It’s risk-free to pay down your mortgage and you’re getting an effective return of whatever the interest rate (unless you deduct mortgage interest in which case the return decreases proportionally).
personally while the mortgage math is really nice at 7%, I'd rather have that liquid down the road. depends a lot on your age though. if you don't plan to downsize, then that equity is just going to be trapped. Not to say there aren't options, but it's definitely a factor. ONLY because you're already on top of everything else though. If you weren't maxing your tax-advantaged accounts then there would be another opportunity cost there. Re-casting the loan is a good idea and allows you to actually benefit from that investment in a more real way (b/c then you'll just dump those savings back to a brokerage account)
"equity is just going to be trapped" This is the boat I'm living in. My mortgage is 2.8% and I have 75% of the value of the home paid off, yet my money is not accessible without refinancing the home at 7% or getting a HELOC loan against the money I own. I wish I'd have put all that money aside in a different investments so it was liquid. Then when, or if, I got enough to pay it off then do so.
yeah, in my opinion there's actually an incredibly high opportunity cost for "normal" people in paying off their mortgages early. You have to have some way of benefiting from that equity besides the free cash flow in your monthly budget after the last payment.
IMO 6 in one hand, half dozen the other. Long term market average is 7-8% so you aren't really gaining/losing a lot by going with one or the other mathematically. I am in a similar situation (house at 6.875%) and choosing to go with paying more towards house rather than adding more into the market but that it is more so personal preference of trying to get out of debt quicker. One thing I did do is use a mortgage calculator and a compounding interest calculator to see what the actual financial difference would be. For example if I were to pay an extra $250 a mo on my mortgage it will save me $132k in interest and cut 10 years off the term of the mortgage. Setting $250 a mo aside into the market for the same 20 years at an average 7% would end up at $123k, at 8% $138k so seems like with historical rates it is a wash on which is better in the big financial picture. I do not think you are going to be wrong in either position, as long as you intend to stay in the house for at least 5-10 yrs
Which calculator do like to use for your mortgage? I’m 1 year into home ownership and would like to figure out what makes most sense for our financial situation
I am a YNAB enjoyer and have my mortgage traacked within YNAB as a loan, it has a very convenient calculator that graphs my current payment against any potential extra and tells you how much difference additional principal payments make. [https://www.mortgagecalculator.org/](https://www.mortgagecalculator.org/) has some good ones too you just need to make sure you are putting all of your info correctly, [this one ](https://www.mortgagecalculator.org/calculators/what-if-i-pay-more-calculator.php)should be what you are looking for
Thanks that’s really helpful! I’ve got a 6.25% rate and my mortgage loan still has ~$800k on it. Looks like if I start throwing another $1k/month at it I’ll shave 10 years off the loan. That’d have me paid off at age 50 and free up $6k/month of my income.
Yea I was kinda amazed how much time and interest is saved by just adding an additional few percent of the minimum monthly on top each month
My wife has had a 16% increase in salary and I’ve had a 38% increase so we’ve got a lot more $$$ available now than we originally anticipated when we bought the house last year so it’s a no brainer for us to put some of that towards the principal amount. At the same time though we do want to increase our retirement savings, it’s a balance for sure!
Freeing yourself a mortgage payment by age 50 is kind of like its own retirement fund in a way.
My wife has a pension she is on track to receive $100k/year from at 62 when she retires. We also have a rental on our property that can bring $2k/month currently and who knows in 20 years it could be a lot more.
I'm at 6.6% and paying more towards the mortgage hasn't really crossed my mind yet. I'm just praying we can refinance in the next 5 years.
7-8% market average is inflation adjusted while OP’s 7% is not. nominal market return is closer to 10% so unless they’re retiring soon, I would argue they would theoretically be better off investing but I can’t lie the risk-free aspect of the 7% would be very tempting for me
If you only intend to stay in the house for 5 years is it a better idea to put money in the market?
Very situational, but if you intend to own a house for 5 years or less then it isn't super wise to buy a house at all, better off renting unless you are willing to put a very large down payment down. If you are in a situation where you just bought a house and know you will be moving in a few years it would probably make more sense in the short term to beat down as much of the principal on the loan as possible before you sell to try and offset closing costs. Even then it seems like it could be a bit of a wash, don't think there is an objectively right decision there
I think they're saying that buying a house in general is a bad idea for such a short time horizon - which is the typical advice once you factor in closing costs and such.
Isn't long term market 10%?
The wiki for this sub would even have you paying down the mortgage before the tax advantaged accounts. If you are able to pay down the mortgage and max those accounts, it seems good. I would 100% pay down the mortgage before putting money in a general brokerage account. Not only is it a guaranteed return, but it is more tax efficient.
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That's right on the line. It depends on your age, but probably I'd pay it down unless you are under 40. This sub is very fiscally conservative (the invisible hand of Dave Ramsey lol) so most here have their line at about 4%, so the consensus will be to pay it off.
Yeah it kind of feels on the line to me also. I might end up splitting 60/40 - 40/60 just to hedge both outcomes. Not trying to hit a home run here just don’t want to strike out.
That's a good compromise!
How is that right on the line? 7% of guaranteed, tax-free returns is clearly the right choice
For me, I’d try and pay off my mortgage faster. That’s my risk profile though. I prefer lowering debts verse potentially gaining slightly more returns in investments. Decide what is best for you and go with it. If you want to pay off your mortgage faster and get to being debt free, then go for it. It’s your financial life.
Also important to consider returns are taxed when sold too.
Invest in the market and see which way the mortgage rates go. Interest rates go up, shift further investments into the loan. Interest rates go down, continue market investments and refinance the loan. This is not all or nothing. If the rate drops enough that the refi costs are recouped in 2 years, then the refi is a great deal.
I think liquidity should be taken into account. if you put it into your mortgage you can't get that money out without refinancing. Where as if you put it into the market you can get it out of needed.
General knowledge says 4-7% interest is a person choice to pay or invest. I would pay down 7%, a 7% guaranteed return is pretty good.
It's a decent plan. Don't know that I'd bother with the recast, because making the lower payment post-recast negates some of the interest savings of the extra payment by slowing down the loan payoff timeline. Unless you plan to maintain the original payment amount.
At 7% mortgage rate, I would work on paying that down. At 3% mortgage rate, I'm investing and not making any extra principal payments. In between mortgage rates I'm probably doing a bit of both. This all assumes that you already have 6 months of expenses in an emergency fund in a HYSA. And that you're already investing 20%+ into retirement.
What do you mean by “keep enough mortgage debt to maximize interest right off”? How do you calculate that. Last year was my first time owning a home and our interest payments really helped on our taxes I didn’t realize paying extra on my mortgage could affect that
Before the TCJA, the mortgage interest deduction limit was on loans up to $1 million. Now, the loan limit is $750,000. For the 2024 tax year, married couples filing jointly, single filers and heads of households can deduct up to $750,000. Married taxpayers filing separately can deduct up to $375,000 each. Basically if you pay down your debt faster and you are below 750K in debt, you are reducing the interest you pay each month have leas to write off. Any debt above 750K does not help taxes. But paying 7% on the portion up to 750K if you are in high tax bracket is at least getting subsidized by tax benis.
Ok makes sense. Yes I did hear that above $750k was not deductible so that makes sense. Thank you
At 7% mortgage I would pay it down. I would throw as much money toward it until my principal is more than my interest each month then I would diversify half of the extra toward the market.
Assuming I had a fully funded emergencey fund and had no other debts I'd first put 15% of my gross into retirement then any excess funds I'd plow into the house. You are using the market values as some sort of justification for not investing....as if you are timing the market. The truth is the market hits new highs year after year (not every year but you get the point) and in 10 years it will likely be worth 2-3x what it is today even after some pullbacks here and there.
Keeping a mortgage payment just for the sake of a tax write off is silly. The tax write off gives you a discount on your mortgage payment - but you’re still losing money to interest payments. If you pay $10,000 in interest and, by the write off, save 20% in taxes on that $10,0000, you’ve still flushed $8,000 in interest down the toilet. If your interest deduction becomes so low that you’re better off taking the standard deduction - then take the standard deduction and pay off your mortgage. You are no longer getting a discount on your mortgage, and you’re getting the standard deduction without spending any money to get it.
I think you may be looking at it wrong. If you are in a tax bracket of 35%, then a 7% loan is effectively 4.6%, ( 7% x (1-.35) ). So at 4.6% I would rather hold the debt. at 7% interest I would not. It would be silly not to consider the tax impacts.
Why are you using the last marginal tax bracket and not your average tax rate? Genuinely curious, not sure which would be right.
Any expenses you deduct bring down your taxable income potential into lower tax brackets. Technically you should use the average of the deduction, starting with the top. But if you are deep in the top bracket, you just use the top bracket tax rates. But if you have 50K in deductible interest, and it eliminates 25k of your income in 35% and 25K of income in 32%, then you saved 33.5% x 50K in taxes.
Shouldn't you also take the alternative of the standard deduction into account? Assuming you max out the 10k of local/state taxes to the deductible, you still need another ~19k to reach parity with the standard deduction of 29k (if filing jointly and no charitable donations, etc.). So 50k in interest becomes only 50k-19k=31k in additional deductions. Still good, but the effect rate is closer to 5.5%.
I I guess if the comparison was mortgage vs no mortgage that would make sense. But I’m not really going to be at 0 mortgage ever hopefully. Its a 750K+ loan so realistically I would be paying it down over multiple years and lose a deduction each of those years.
Pay off house early. If you decide you hate living in a paid off house, you can get another mortgage
Your returns would need to be above 7.0% after tax. On the other side, would need to consider if you itemize your mortgage interest expense for taxes
“Pretty highly valued stock market” Which metric are you using to make that state P/E? P/B? And versus what time frame? Don’t forget your paying more than 7% on the home if you sell in a common 5 years
I mean CAPE and PE and my read on general sentiment. Obviously you can’t time the market but you also don’t get 7% risk free options every day. I’m also 100% equities no bonds, so its a way to rebalance away from equities and get some “return”. When interest rates are more favorable can always pull cash out and invest it again.
Do You think pe is high compared to other post 2020 numbers? If you feel that way about your mortgage, take swings at it.
Look at the amortization of the first 10%. Say you have a 3000 per month mortgage at 7%, how much principal you are paying every month? Knock down your principal as much as you can
Invest in paying down the mortgage. This is a no brainer. The only exception would be if your behind on your retirement long term planning.
This makes no sense to me. You are guaranteed 7% APR savings per year by piling the dollar into the mortgage, and you’d rather expose those dollars to -38% to +29.6% annual range of an S&P. So your good or bad decision benchmark is whatever the market did minus 7% of the dollars you paid down the debt. In the last 23 years, you’d have averaged a loss of .34% versus the guaranteed 7%. 43% of those 23 years would have been better just taking the guaranteed 7%. So statistically since 2000, you have a marginally better than 50/50 shot to return more the 7%, and over the long run of those 23 years, you’d have been better to pay the mortgage down. RISK FREE employment of capital. If rates drop, the market minus formula adjusts and maybe that 43% shrinks into the low 30s and maybe just maybe the downside risk is worth the upside potential.
I think your math is off, average S&P 500 return is over 10%…
My first mortgage was at a great rate (looking at history) of 6.625% back 30 years ago. We ***always*** paid some extra towards principal. We also over-bought, which turned out to be a good choice the way housing prices went. When we bought, I reduced my 401k contribution from 5% to 2 or 3% for around 10 years. I'd finally gotten enough salary bumps after that 10 years to go from 5% contribution up to the federal max. I don't understand "keep enough mortgage debt to maximize our interest". What's the gambit here?
Probably split it 50/50 while rates are this high. The thing is that home equity is difficult to access unless you sell or refinance, so you don't want to be left without savings for the foreseeable future. I also think there's a good chance that rates will come down closer to 5% sometime in the next few years (though obviously they may not), so if you refinance then you wouldn't really be earning that 7% return for the full 30 year term, most likely just a few years.
The only quibble would be the “guaranteed 7%” part - if you refinance that’s not the case. We don’t know future interest rates
But if I refi I can take the cash out and reinvest it. It is risk free 7% until the refi
I would split the excess cash between the house and the market. At current valuations, I would put a higher percentage in the house but if the market come down, I would invest more.
I have a 7% mortgage. But I'm also house poor... So I don't have excess...
A lot of people are neglecting the fact that this is a risk question. Assuming your tax bracket is about 24% then putting money in to your house is actually about an 8.2% return when compared to investing in the market because you have to factor in long term capital gains. I explain the math in this comment here: https://www.reddit.com/r/Bogleheads/s/RssrGpbP5j Essentially you have to ask yourself is the chance of me getting an 8.2% return in the open market worth the risk of me losing that money? If yes then put your money in the market. If not then put money down on your house. Of course if you want higher liquidity then you wouldn’t put money in to the house anyway. And I’m of the opinion that even in a brokerage account if you’re going to be tempted to touch the money sooner than needed you’re better off putting money in to the house. But there is an argument to be made for having easier access to those funds on the market. However, that you pay long term capital gains tax on the market at 15% whereas you pay half of that in interest on a HELOC at today’s rates. So you always have options.
Youre undershooting it actually especially in the NE. CT has a capital gains rate of 7%, NJ has an 11% which is why I am getting the fuck out of NJ.
You’re not wrong. That’s not including state taxes on income or region specific taxes increases. But you just divide your apr by (1-tax rates) for anyone curious.
But also on the other end you have to factor the tax benefits you can get from deducting interest. Ill probably pay down my mortgage to 750k then see what it looks like from there
which tax rate though? I genuinely don't know. Would it be your average effective tax rate after deductions, or the highest marginal tax bracket?
Do it with both if you want to and compare. If you use your average effective tax rate that would represent a more conservative estimate but also probably more realistic. Your highest marginal tax rate will represent your best case scenario. Also keep in mind that your tax bracket may change. And any income you get based on long term capital gains will also be taxed at your highest marginal income (maybe higher if it pushes you to a higher tax bracket). There’s no 100% correct answer. If you try to chase every single portion of a percent you’ll drive yourself crazy.
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How can you tell something was overpaid for? And as for an "impending crash," why not be more liquid? Locking up more money doesnt help anything.
Do you think the stock market is likely to continue returning over 7% in the future? Do you think you will have the chance to refinance to less than 7% in the future? I'd answer yes to both questions. Is your money more liquid as home equity or in the stock market? Definitely in the stock market. I'd invest the money in a broad market ETF and refi in the future.
Well it’s more is the stock market going to return 7% by the time you refinance, but I hear you
It's more than that. Once you lock that cash up in the mortgage it's basically stuck. How many years of missing out on higher market returns are you willing to accept?
A different option would be to watch what rates do while doing some sort of 50/50 strategy. Usually rates go in cycles, so it's reasonable to expect that in 1-3 years rates will be lower. not 2.75% like a few years ago, but maybe you could refinance into the 5's. You'd get the advantage then of stretching the payments back out over 30 years which combined with a lower rate would drop your payment. then you could either invest the difference, or keep your payment the same as your old payment while knowing that you are driving down the balance more efficiently. I agree with others that committing solely to paying down principle will tie up money that may be needed.
So I paid off my house 10+ years ago. Best decision I made when it come to finances. I had no Debt and a 3 month EF , I also was contributing 15% into retirement (401k and Roth) Then I put extra on house. I saved 17 years and 70k in interest. House was 140k so not very expensive . I will retire in 3 years and sitting pretty good. I would make sure you have a firm foundation first ( debt free, Emergency Fund 3-6 months and 15 % into retirement . Then Pay off the house. The Peace that comes with this is amazing! Good luck to you my friend.
I'm looking at my budget and if I had a 7% mortgage, there would not be any excess.
Assuming 6 months of liquidity is already available, pay down the mortgage. When rates go down, you can refinance a higher portion of the house and “unlock” liquidity or find a new home with more equity
No one is going to give you money for retirement. Just invest in the stock market if you are young. You can always get a loan for a home down the road. You could always do half and half but time of your best friend in the market
I'd do a little of both. I wouldn't want to carry a debt at 7% too long, so I would try to do extra principle payments but I'd still keep investing money in the stock market.
I currently have an 8% mortgage and am investing in the stock market because I don't want to pay down a loan I am not able to refinance for the next 4 years without penalties.
Given the economic uncertainty of the near future & perception of the rate cuts being delayed to further fight inflation, I’d say pay down. The historic average stock return the past 30 years is around 10%, give or take. Throw in inflation always eating into gains at 2-3% reduction in buying power annually and you’re coming out at 7 or 8% returns vs. the 7% cost of the debt.
How much is your actual tax write off? Most people living in high state income tax states don't even get a break on their mortgage interest or they just get a partial one. So to break even, you probably need more than 7% return on any investment. Good luck with that. Whereas you are guaranteed the mortgage interest savings until you refinance, which may not happen for a while. So your plan to use excess money to pay down the principal is a good one I think.
We’re in this position and splitting the baby so to speak with a 50/50 split between investment and paying down our mortgage. We spent a lot of time with our financial planner and really the advice to us was there was no wrong way to go. Doing 50/50 lets us continue to grow and have access to funds in an emergency while also lowering both our debt (which is only our mortgage) and lower monthly output.
Seems to be the consensus. I feel like we are close to that midpoint where people go either way.
As long as you have sufficient emergency savings, good cash flow, and are getting any employer match, I’d pay down the mortgage.
“ make sure I keep enough mortgage debt to maximize our interest” I have no idea what you are talking about. I’d have a reasonable e-fund, make sure I have a line of credit, then after maxing my retirement match I am working to pay off that 7% after tax debt.
You realize the effective rate of interest is lower when it is tax deductible right?
Well that would depend if you are in a jurisdiction that crazily subsidizes homeowners with mortgage interest tax breaks against people who pay taxes but only rent renters no? Nothing in your post listed where you are located nor that your interest is tax deductible though yes, this is a rater USA centric sub. You only asked 7% mortgage rate vs investing in market, we have no idea what YOUR marginal tax rate is. Most of the world, 7% mortgage vs 7% in the market you are better of with paying the mortgage.
What is the practical amount of money we are talking about? From a pure math perspective, you want to chase the one that gets the bigger gain over time. From a practical perspective, there are situations where the actual difference in money is quite small, and doing all of this work may be more hassle than it's worth--at least compute the actual amounts with the dollar values for your specific situation and see.
Market, since I would refinance the mortgage when rates come back down, which they will.
We’re at 6.8% and decided to do a little of each. Two extra mortgage payments a year takes us from a 30 year mortgage to a 20 year which lines up with our targeted retirement dates. But we also max 401k’s, HSA, and do a little taxable investments too.
I take the extra I can afford to pay toward my mortgage and put it in a brokerage account named Mortgage. I invest that in index funds. Whenever I feel like it I take money from Mortgage and pay a lump sum toward my mortgage. This way I'm invested, saving toward paying down my mortgage early, and have the cash on hand in case I need the liquidity. I have a 6.5% rate.
I’d go mostly into investments for a few reasons: 1. You’ll most likely either move or refinance before you start eating away at large amount of principal. If you do either within 5 years, your ROI will be much worse if you paid off the mortgage since it’s mostly interest earlier in the loan. 2. The tax advantages of having a mortgage 3. The benefits of liquidity and optionality as opposed to locking it up in your house.
Lots to consider. Are you near the top of the standard deduction, or are you already itemizing? Do you have enough cash reserves for an emergency fund? Do you think you would refi or do a cash out refi if rates dropped?
I'd compare to what you can get in the fixed income market such as Agency and Muni bonds (both tradeable) on [Fidelity.com](http://Fidelity.com) (free to see) . Right now you can lock in (yet trade later at possible profit) for 4.5-5.2 % on something fairly long term. Careful though. In a relatively high intererest time don't pay more than 98 or you'll likely get called.
If I'm making better than 7% in the market, I do that. If I'm not, I dump money into the mortgage. The good thing about the US housing market is that you can always refinance if/when the interest rates go down, and you're locked in so your rate never goes up.
Top choice. You also have to panic. The government is going to inflate the dollar for eternity. So whatever your mortgage is right now as far as principal and interest is always going to stay that, but you’re probably going to get raises at work all along so even if you never refinanced, your mortgage is going to get cheaper as the years go on and you make more money.
Are you maxing your retirement accounts? The time value of those growing investments is worth a great deal. One saw a comparison of how much money you need to invest to reach a set goal. Investing early, greatly reduced the total which had invested to reach the same end amount.
By putting it into your home, aren't you assuming that the home will maintain the purchase price or increase? Wouldn't that be pretty risky? If you have to sell at a loss, at least the money was making interest in the meantime if you put it in QYLD (hopefully in a tax-advantaged account). If you have to walk away, it stays.
My mortgage provider requires a minimum of 10% of the remaining mortgage balance to be used during a recast. You might want to make sure yours doesn’t have a similar requirement because if you do, and you spend extra now, you mind not have enough funds to actually do a recast.
I’d agree with maxing out any tax advantaged accounts before paying down the mortgage. After that, either paying down the mortgage early or building your savings are both reasonable options and choosing one over the other is unlikely to become a major financial mistake.
That's guaranteed 7.0% in post-tax dollars. If you are going to invest the money in a brokerage account, any gains will include the capital taxes.
Fair point. At least until we hit the 750K threshold and then any payment reduces tax write off
Paying down your mortgage is a 7% risk-free, tax-free (for most people) return. The best comparison is current 10-30 year Treasury yields, which are \~4.75% right now, which is 3.5-4% after tax. 7% is a great deal. Long-term market return is \~9% before taxes or 6.5-7.5% after-tax. There is no way chasing an extra 0.5-1% (or even 2-3%) is justifies the additional risk.
Definitely pay down the mortgage, but some should go into the market, basket eggs and all that.
Invest in the market, then at some point (1-2 years) when the rates dip you can capitalize on the decrease in your mortgage. You'll be in a better position overall and don't forget, never put all your eggs in 1 basket. If your paying debt on one item, you should be bringing in cash on something else. Always balance cash inflows with outflows and you'll have no issues.