Planning—Other / Pay off mortgage or save/invest it
May 10, 2022
Pay off mortgage or save/invest it
How do you know when to prioritize one over the other? I'm one who likes to get rid of debt but with my home mortgage rate low, people keep telling me to save or invest the extra money instead of pay down the mortgage. How do you decide which to do? What tools and calcs should I look to to make trade-off decisions? - I bought a home for $440,000 a year ago, mortgage rate is about 3% on a 30 yr fixed, I put down 20% - I have a car that I own free and clear - I save into my work 401k and have a buffer savings account - I started an individual brokerage account last year and have about $25K invested, not planning to tap into that - Married but no kids
Replies (6)
May 11, 2022
@XavierWD4, Great question. I always struggle with priorities too and so much of it is personal! Some food for thought: - The fact you have a fixed-cost mortgage is great. You've locked in a low rate in this rising rate environment. Feel good about that even if you hate debt. - Saving into the Series I-bond may be a good option if you want some level of protection but you'll have to be locked in for at least a year and any withdrawals before the 5 year mark you'll lose (a minimal) 3 months of interest. The interest rate for the next 6 months is close to 10%. That sure does beat the 3% mortgage interest. - Continuing to invest can pay off well in the long run, despite the market craze right now All to say that if it were me, I'd save and invest it all - specifically I'd put the max $10K into the Series I-bond and the rest into dollar cost averaging into an equity fund (VOO is my flavor).
May 11, 2022
@XavierWD4, I'd also love to know if there are tools to help people prioritize these kinds of decisions! How long do you plan to keep the home? If it's not for long, don't work to pay off that mortgage. There is a lot of freedom that comes with paying off your home so I think it's a good goal to work towards. But doing both could also work nicely. Investing and saving more doesn't make our debt go away at the end of the day! Sorry can't be of more help but I'll be following this to see what others say.
May 13, 2022
@Freddie422, valid points. I'm planning to stay in my home for at least 10 years maybe more. I don't really have any plans to sell it soon but I can't say it's my forever home either. I do want that freedom to pay it all off because I don't want to be nearing 60 and still have a mortgage.
May 11, 2022
@XavierWD4,Great discussion here. A few other pointers: 1. Invest more into your work 401k if you can; look into whether you are eligible for an HSA too; the tax benefits are too good to pass up 2. If you plan to live in your home for at least another 10+ years, paying off your mortgage can be worthwhile; make sure you don't have prepayment penalties imposed if you do pay down your mortgage 3. But with a fixed mortgage rate of 3% and inflation of say 8.5%, many people would probably opt to pay the bare minimum in such a scenario. 4. If you do invest, invest prudently (meaning what you're okay losing!)
May 19, 2022
@XavierWD4, With inflation at 8.5% the way I would look at this is that assuming inflation sticks around, your purchasing power today is much higher than it is tomorrow. The value of your dollar can buy more goods today than it can tomorrow. But because your mortgage at a flat 3% fixed rate doesn’t adjust for inflation, your debt then technically becomes cheaper over time. If it were me, I'd keep paying the 3% you've locked in on your mortgage and save/stash and invest. There will be more pain in the markets this year but in the long run this bear market will be a small scar or blip on the radar years from now. GL!
May 24, 2022
@Katie26C, that's really helpful the way you describe the benefit of keeping a mortgage at such a low rate!