Having a mortgage: pay off your house or diversify?

Submitted by 2giornot2gi t3_11dq5lt in personalfinance

Recently got in the door for my first house at 25.

From what I can see, there are two directly opposed schools of thought on how to proceed:

a) Pay off your house, live in it, and be content

b) Use your capital to reinvest and build more wealth

I know this is a very broad topic, I'm just looking for people's opinions.

At a glance I'm pretty firmly in camp A. I don't see anything that I could invest in that would give me and my family the comfort and security of simply parking my money into my mortgage. Especially not more property.

On the other hand, If I found myself with some play money at the end of the month I would feel tempted to invest into indexed funds, which I'd prefer to start doing sooner rather than later. On the other other hand, everything that doesn't go into my mortgage delays me paying off my mortgage.

Very conflicted and keen to hear people's thoughts.

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Comments

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avalpert t1_jaa96z4 wrote

What's the interest rate on the mortgage - that is the single most relevant piece of information to making a financial decision about whether to pay towards it or not and you didn't even mention it.

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2giornot2gi OP t1_jaabpsi wrote

Right now it's very low, but will go up incrementally over the next five years until it hits market value.

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avalpert t1_jaagu1n wrote

So it is a variable rate? What is it now and what are the adjustment steps?

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2giornot2gi OP t1_jaap5ai wrote

2.64% rising .25% every year until it hits market.

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avalpert t1_jab8c5k wrote

That's pretty low and not rising all that quick. I wouldn't even consider paying more towards it for the next few years. Absolutely not when even savings account rates are higher - me personally, I wouldn't rush it so long as the rate is less than 300 basis points over the 10-year treasury (about half of the historical equity risk premium).

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2giornot2gi OP t1_jaf4qy3 wrote

Okay, now explain it like I'm five...

You're saying it isn't worth investing more into the house while the rates are low because the extra room in my budget is simply better utilized elsewhere? And I should only be trying to pay more of my mortgage when higher rates force me to?

Thanks for your insight. Sorry for my ignorance, I'm very new to this.

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Werewolfdad t1_jaa4tb6 wrote

Start here: https://www.reddit.com/r/personalfinance/wiki/commontopics

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Left-Landscape-3890 t1_jaa53gh wrote

This gets bashed...but whatever. The more you pay down your principle, the better throughout the life of the loan. The sooner, the better. You pay interest every month you have the loan out based on outstanding principle. The more paydown, the fastest possible will save you money. I paid down over 100k in my first year ish and probably saved 100k in interest and over 5 years in payments. I like that ROI. Not optimized, but not a bad way to go. I'm back to minimum payments now 2 years in.

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dust4ngel t1_jaamidg wrote

> I like that ROI. Not optimized

do you like that you're getting sub-optimal returns on your money? most people don't like that.

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landmanpgh t1_jaa9mv6 wrote

Assuming your interest rate is fairly low, it's usually better not to pay off your mortgage.

That being said, we're also human, not robots. Some people aren't disciplined enough to have extra money in their accounts each month and won't actually invest it. In that case, paying off the mortgage faster is smarter than nothing.

Youre definitely not going to complain that you have too much equity in your home or that you don't have a mortgage because you paid it off early. Could you have made more money in the market? Probably. But that's assuming you would've actually invested.

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2giornot2gi OP t1_jaabj7d wrote

My interest rate is quite low for now. What's the reasoning behind not paying off the mortgage?

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znark t1_jaad0sr wrote

One is that stock market grows faster on average. You make more money by investing.

Two is liquidity. It is much better to have money in brokerage account than in equity in house. The equity is harder to access when you need it, you have to sell the house or take out home equity loan. Brokerage account is fast to sell and transfer and can use for anything you want. A good example is can use the money for down payment on new house and wait to sell old house instead of having to sync the sales.

This assumes that you are the kind of person that can save and not spend it. If you can't then paying down mortgage is way to save money without having access.

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abl444 t1_jaaen23 wrote

What is it? It’s all just a math problem so “low” isn’t too helpful? For now?

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2giornot2gi OP t1_jaap0oa wrote

2.64%, rising .25% every year until it hits market value.

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landmanpgh t1_jaad29g wrote

If you take the extra money you were going to put towards your mortgage and invest it instead, your returns will be greater than what you gain in equity. You can usually get roughly an 8% return in the stock market, and hell, even CDs are offering like 5% right now. So if you keep that up for 30 years, your investments will far outpace what you can gain in home equity.

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alwayslookingout t1_jaabw1w wrote

I’m not sure why there are only two choices. You can do both.

If your rate is low then it makes no sense to pay the mortgage off early except peace of mind.

If your rate is high you can pay do both- pay extra while investing. If rate drops you can refinance and reassess. Nothing is set in stone.

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AlsoRussianBA t1_jaatk7b wrote

I'm in the "both" camp, and I refi'd to 2.25%. Every raise I add a little bit to my monthly mortgage payment. Savings all go to investments.

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