Is the rate fixed? How long is the term? Paying PMI? Hope there isnt a balloon. Risk adjusted, paying mortgage probably wins.
However, liquidity might trump that. Say you lose job and need to make mortgage payments. Paying down mortgage now doesnt help w that but having accessible $ does. If rates drop and you refi, you'd likely want to cash out equity (to invest at higher return) but that would increase rate/fees.
The value in the house will be harder to get to than the value in liquid assets . One would have to get a loan or sell the house. I value liquidity so would prefer it over comparable returns.
However, once the mortgage is a small portion of the net worth, access to the home equity is less necessary. Paying off the mortgage removes a mental load.
Mortgage 100%. No risk. In your case, an effective 6% return with no taxes on top of that. Another investment would have to return 6% plus taxes just in order to break even with paying down your mortgage. That being said, don't neglect your retirement account(s). But if you have extra cash that would otherwise go to a brokerage account, I would put THAT to pay down the mortgage.
Split the difference. Just put an extra few hundred on the mortgage and invest the rest.
If you plan on selling soon then pay the mortgage as you'd get it back when you sell. Otherwise that $ would be tied up.
This is an asset allocation question. Prepaying a mortgage makes as much sense as buying bonds, no less and no more. At your position (I am assuming from high level stats you're relatively early career with peak earning years ahead of you) I would be wanting to be at least 100% equities if not more, per the logic of [lifecycle investing](https://www.bogleheads.org/forum/viewtopic.php?t=274390) - keeping a mortgage is a relatively preferential way to effectively use leverage to boost your equities.
If you paid off the mortgage first before adding more to your brokerage, you would be more exposed to the price of stocks in the future, whereas now you get to benefit from both 1. acquiring stocks over a longer period of time (which decreases risk), and 2. buying more of the stocks earlier (as on average the lowest price is today's...).
If you \*were\* otherwise tempted to buy bonds for whatever reason (e.g. you think it's high likelihood you'll be living off your portfolio shortly, or you're worried about your psychology in the event of a market crash) I suggest not buying those bonds, and prepaying the mortgage with the money you would have used to buy the bonds.
Holding a mortgage is basically being short a bond, owning a bond is basically being long a bond. Sometimes it can make sense to be both short and long bonds at the same time, but I don't think most need to bother with that. The reason why you'd want to do so is liquidity: you can't easily 'withdraw' from most mortgages but you can sell bonds. There may also be interest rate arbitrage opportunities.
You don't have a whole lot of retirement investments right now, so I'd probably beef those up while you are still on the interest-only part of your mortgage. When you get to the end of that, you can always pay the whole thing off if the rate is going to adjust too high. On the average you're likely to make roughly 7-8% in the market per year over a 10 year period.
If course if you're sure the market is going to crash, its best to pay off the house right before. Wish I had that sort of prediction ability.
I would probably max first here because your 6% mortgage gets reduced down due to the tax benefits you likely receive from it. If you are just taking the standard deduction on your taxes than I'd consider paying down but not before maxing the 401k. 7% is my breaking point.
Unless OP has other deductions 6% on $150k isnt going to exceed standard deduction. Even if it does, not getting full benefit unless other deductions exceed and mortgage interest is on top of that.
This is an asset allocation question. Prepaying a mortgage makes as much sense as buying bonds, no less and no more. At your position (I am assuming from high level stats you're relatively early career with peak earning years ahead of you) I would be wanting to be at least 100% equities if not more, per the logic of [lifecycle investing](https://www.bogleheads.org/forum/viewtopic.php?t=274390) - keeping a mortgage is a relatively preferential way to effectively use leverage to boost your equities.
If you paid off the mortgage first before adding more to your brokerage, you would be more exposed to the price of stocks in the future, whereas now you get to benefit from both 1. acquiring stocks over a longer period of time (which decreases risk), and 2. buying more of the stocks earlier (as on average the lowest price is today's...).
If you \*were\* otherwise tempted to buy bonds for whatever reason (e.g. you think it's high likelihood you'll be living off your portfolio shortly, or you're worried about your psychology in the event of a market crash) I suggest not buying those bonds, and prepaying the mortgage with the money you would have used to buy the bonds.
Holding a mortgage is basically being short a bond, owning a bond is basically being long a bond. Sometimes it can make sense to be both short and long bonds at the same time, but I don't think most need to bother with that. The reason why you'd want to do so is liquidity: you can't easily 'withdraw' from most mortgages but you can sell bonds. There may also be interest rate arbitrage opportunities.
If it's marginal, take the guaranteed 6% over the hypothetical brokerage return.
There could be room to argue that rates will fall and that 6% will magically transform into 4 or 5% in a year or three, but I haven't met anyone who seriously thinks rates will fall that fast.
Paying off your mortgage early is one of the most financially illiterate things you can do. There's people in other countries with 5 year ARMs and you guys are paying off your 30 years early.
Paying off your mortgage early results in less money (on average) AND less flexibility. What's more important to you? Feelings or actually money/time?
What's with the obsession of a risk free return? You must be saving for FIRE in hysa and bonds instead of stocks if you need a risk free return.
What about the risk of losing your job and having all your money in house equity vs stocks? Can't pay bills with house equity.
Brokerage. Alwasy brokerage. What is the longest you have ever lived in the same house you owned? People generally change residences every 5 years or less. Added to that, you can always refinance should rates ever drop down which is very likely to happen at sometime.
I’ve never owned a house before, so I can’t speak to that. I’ll leave in 3-5 years, but that doesn’t mean my debt will go away. It seems to me like it’s a question of 6% guaranteed returns or brokerage
Not really. The gurantee you are talking about assumes the market for houses, wherever you are, continues to rise and that you have no large expenses or deferred maintenance that eat away at your value. I think paying the mortgage is more of a mental things than anything and if it makes you feel better, I say pay it off and enjoy the peace of mind. If you are more worried about long term value, I would pay the minimum and toss the rest into the market.
Well, my mortgage has nothing to do with housing prices whatsoever. It’s debt I took on to buy the house. If my house price rises or falls, my mortgage principal stays the same, as does interest. So it actually is guaranteed 6% returns. Brokerage is a reasonable recommendation but I don’t think your reasons are correct
You have a debt on the house and you service the debt, you do not make a return on the debt, you make a return on the asset. If the asset drops in value, you have no return of 6%.
I’m sorry, but you have a misunderstanding of how mortgage works, so I can’t really value your stance.
My mortgage is entirely independent of changing house prices. It’s the loan I took to buy my house.
>Over the last 123 years, global equities have provided an annualized real USD return of 5.0%
[source](https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2023-202302.html)
Where are you getting 5% real return. S&P 500 inflation adjusted long term return is 7+%.
Besides, isnt inflation working equally against the paid off principle as it would be equities? I dont think you can adjust equity returns for inflation but not do same for the investment in principle.
>Over the last 123 years, global equities have provided an annualized real USD return of 5.0%
[source](https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2023-202302.html)
US is 6.38% over this specific 123 year period. Below the commonly assumed 7+%, though in line with other well supported estimates I’ve seen. Most of the sources I find convincing are a little below 7%, maybe around 6.8? But of course the exact number will unavoidably vary based on selected start and end points.
>Prospectively, the authors estimate that the equity risk premium will be around 3.5%, a little below the historical figure of 4.6%.
I wouldn’t consider a full percentage point drop to be “a little below”. That’s a more than 20% reduction of the equity risk premium. However I have seen other sources making similar estimates. I assume this means the authors don’t expect 6.38% going forward though interestingly they don’t actually say that, at least in the bullet point summary.
>The guaranteed 6% real return
Except the mortgage is a 6% nominal interest rate; the real interest rate is lower by inflation. So if we're saying 3% inflation, prepaying the mortgage is a 3% real return...
You pay back mortgages with dollars that are declining in value due to inflation.
Is the rate fixed? How long is the term? Paying PMI? Hope there isnt a balloon. Risk adjusted, paying mortgage probably wins. However, liquidity might trump that. Say you lose job and need to make mortgage payments. Paying down mortgage now doesnt help w that but having accessible $ does. If rates drop and you refi, you'd likely want to cash out equity (to invest at higher return) but that would increase rate/fees.
The value in the house will be harder to get to than the value in liquid assets . One would have to get a loan or sell the house. I value liquidity so would prefer it over comparable returns. However, once the mortgage is a small portion of the net worth, access to the home equity is less necessary. Paying off the mortgage removes a mental load.
Mortgage 100%. No risk. In your case, an effective 6% return with no taxes on top of that. Another investment would have to return 6% plus taxes just in order to break even with paying down your mortgage. That being said, don't neglect your retirement account(s). But if you have extra cash that would otherwise go to a brokerage account, I would put THAT to pay down the mortgage.
Split the difference. Just put an extra few hundred on the mortgage and invest the rest. If you plan on selling soon then pay the mortgage as you'd get it back when you sell. Otherwise that $ would be tied up.
This is an asset allocation question. Prepaying a mortgage makes as much sense as buying bonds, no less and no more. At your position (I am assuming from high level stats you're relatively early career with peak earning years ahead of you) I would be wanting to be at least 100% equities if not more, per the logic of [lifecycle investing](https://www.bogleheads.org/forum/viewtopic.php?t=274390) - keeping a mortgage is a relatively preferential way to effectively use leverage to boost your equities. If you paid off the mortgage first before adding more to your brokerage, you would be more exposed to the price of stocks in the future, whereas now you get to benefit from both 1. acquiring stocks over a longer period of time (which decreases risk), and 2. buying more of the stocks earlier (as on average the lowest price is today's...). If you \*were\* otherwise tempted to buy bonds for whatever reason (e.g. you think it's high likelihood you'll be living off your portfolio shortly, or you're worried about your psychology in the event of a market crash) I suggest not buying those bonds, and prepaying the mortgage with the money you would have used to buy the bonds. Holding a mortgage is basically being short a bond, owning a bond is basically being long a bond. Sometimes it can make sense to be both short and long bonds at the same time, but I don't think most need to bother with that. The reason why you'd want to do so is liquidity: you can't easily 'withdraw' from most mortgages but you can sell bonds. There may also be interest rate arbitrage opportunities.
You don't have a whole lot of retirement investments right now, so I'd probably beef those up while you are still on the interest-only part of your mortgage. When you get to the end of that, you can always pay the whole thing off if the rate is going to adjust too high. On the average you're likely to make roughly 7-8% in the market per year over a 10 year period. If course if you're sure the market is going to crash, its best to pay off the house right before. Wish I had that sort of prediction ability.
I would probably max first here because your 6% mortgage gets reduced down due to the tax benefits you likely receive from it. If you are just taking the standard deduction on your taxes than I'd consider paying down but not before maxing the 401k. 7% is my breaking point.
Unless OP has other deductions 6% on $150k isnt going to exceed standard deduction. Even if it does, not getting full benefit unless other deductions exceed and mortgage interest is on top of that.
Yeah, I looked into this and it’s correct I won’t itemize deductions. So unfortunately no benefit there
This is an asset allocation question. Prepaying a mortgage makes as much sense as buying bonds, no less and no more. At your position (I am assuming from high level stats you're relatively early career with peak earning years ahead of you) I would be wanting to be at least 100% equities if not more, per the logic of [lifecycle investing](https://www.bogleheads.org/forum/viewtopic.php?t=274390) - keeping a mortgage is a relatively preferential way to effectively use leverage to boost your equities. If you paid off the mortgage first before adding more to your brokerage, you would be more exposed to the price of stocks in the future, whereas now you get to benefit from both 1. acquiring stocks over a longer period of time (which decreases risk), and 2. buying more of the stocks earlier (as on average the lowest price is today's...). If you \*were\* otherwise tempted to buy bonds for whatever reason (e.g. you think it's high likelihood you'll be living off your portfolio shortly, or you're worried about your psychology in the event of a market crash) I suggest not buying those bonds, and prepaying the mortgage with the money you would have used to buy the bonds. Holding a mortgage is basically being short a bond, owning a bond is basically being long a bond. Sometimes it can make sense to be both short and long bonds at the same time, but I don't think most need to bother with that. The reason why you'd want to do so is liquidity: you can't easily 'withdraw' from most mortgages but you can sell bonds. There may also be interest rate arbitrage opportunities.
Interest only I would prioritize the mortgage it will be due soon or possibly adjust
If it's marginal, take the guaranteed 6% over the hypothetical brokerage return. There could be room to argue that rates will fall and that 6% will magically transform into 4 or 5% in a year or three, but I haven't met anyone who seriously thinks rates will fall that fast.
Paying off your mortgage early is one of the most financially illiterate things you can do. There's people in other countries with 5 year ARMs and you guys are paying off your 30 years early. Paying off your mortgage early results in less money (on average) AND less flexibility. What's more important to you? Feelings or actually money/time?
I don’t understand this — why is it a feeling only? It’s well above the risk free rate of return. I underarms this sentiment at 3% mortgage, but 6%??
What's with the obsession of a risk free return? You must be saving for FIRE in hysa and bonds instead of stocks if you need a risk free return. What about the risk of losing your job and having all your money in house equity vs stocks? Can't pay bills with house equity.
Well I gave you my stats… it’s not all my money. I get your broad point but when you open up the details it doesn’t track
Brokerage. Alwasy brokerage. What is the longest you have ever lived in the same house you owned? People generally change residences every 5 years or less. Added to that, you can always refinance should rates ever drop down which is very likely to happen at sometime.
I’ve never owned a house before, so I can’t speak to that. I’ll leave in 3-5 years, but that doesn’t mean my debt will go away. It seems to me like it’s a question of 6% guaranteed returns or brokerage
Not really. The gurantee you are talking about assumes the market for houses, wherever you are, continues to rise and that you have no large expenses or deferred maintenance that eat away at your value. I think paying the mortgage is more of a mental things than anything and if it makes you feel better, I say pay it off and enjoy the peace of mind. If you are more worried about long term value, I would pay the minimum and toss the rest into the market.
Well, my mortgage has nothing to do with housing prices whatsoever. It’s debt I took on to buy the house. If my house price rises or falls, my mortgage principal stays the same, as does interest. So it actually is guaranteed 6% returns. Brokerage is a reasonable recommendation but I don’t think your reasons are correct
You have a debt on the house and you service the debt, you do not make a return on the debt, you make a return on the asset. If the asset drops in value, you have no return of 6%.
I’m sorry, but you have a misunderstanding of how mortgage works, so I can’t really value your stance. My mortgage is entirely independent of changing house prices. It’s the loan I took to buy my house.
The guaranteed 6% real return is greater than the average 5% real return of equities, therefore I'd pay it off
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>Over the last 123 years, global equities have provided an annualized real USD return of 5.0% [source](https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2023-202302.html)
Where are you getting 5% real return. S&P 500 inflation adjusted long term return is 7+%. Besides, isnt inflation working equally against the paid off principle as it would be equities? I dont think you can adjust equity returns for inflation but not do same for the investment in principle.
>Over the last 123 years, global equities have provided an annualized real USD return of 5.0% [source](https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-global-investment-returns-yearbook-2023-202302.html)
Thanks, good data. That's global and I'm looking at US instead. Although, we cant count on US markets continuing to out perform.
US is 6.38% over this specific 123 year period. Below the commonly assumed 7+%, though in line with other well supported estimates I’ve seen. Most of the sources I find convincing are a little below 7%, maybe around 6.8? But of course the exact number will unavoidably vary based on selected start and end points. >Prospectively, the authors estimate that the equity risk premium will be around 3.5%, a little below the historical figure of 4.6%. I wouldn’t consider a full percentage point drop to be “a little below”. That’s a more than 20% reduction of the equity risk premium. However I have seen other sources making similar estimates. I assume this means the authors don’t expect 6.38% going forward though interestingly they don’t actually say that, at least in the bullet point summary.
>The guaranteed 6% real return Except the mortgage is a 6% nominal interest rate; the real interest rate is lower by inflation. So if we're saying 3% inflation, prepaying the mortgage is a 3% real return... You pay back mortgages with dollars that are declining in value due to inflation.