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      06-13-2020, 10:01 AM   #1
dinonz
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Mortgage/Investment question

With the rates low right now I'm looking at refinance options but I had some questions that smarter people might know the answers to.

Right now I'm planning to start dropping $5K a month into an investment account at Edward Jones. Am I better doing that, or dropping an extra $5K a month into my home loan? Instinctively people tend to think that "pay off debt is best" but in my mind, it's only 3.5% interest, it's tax deductible, and I could earn more from my money in an investment account. I am only 4-5 month into the 30 year home loan.

Other option is to refinance to a 15 year at about 2.6% to pay it off sooner, but again - is it worth it?

As far as I see, the home loan is cheap money.
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      06-13-2020, 11:33 AM   #2
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Quote:
Originally Posted by dinonz View Post
With the rates low right now I'm looking at refinance options but I had some questions that smarter people might know the answers to.

Right now I'm planning to start dropping $5K a month into an investment account at Edward Jones. Am I better doing that, or dropping an extra $5K a month into my home loan? Instinctively people tend to think that "pay off debt is best" but in my mind, it's only 3.5% interest, it's tax deductible, and I could earn more from my money in an investment account. I am only 4-5 month into the 30 year home loan.

Other option is to refinance to a 15 year at about 2.6% to pay it off sooner, but again - is it worth it?

As far as I see, the home loan is cheap money.
The answer to your question is simple. You're asking: Should I contribute $5k to a mortgage where I'm paying interest every month, or contribute to an investment account where I'm going to be earning interest every month.

Seems like a no brainer.
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      06-13-2020, 11:42 AM   #3
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Lots of subjectivity here, mainly around how you psychologically view debt and your tolerance for debt. The example given above by BimmerDimmer is valid, and one of many ways to look at this.

Factors to consider:
- your age
- your establishment, or not, in your career (accomplishments, clientele, resume)
- stability of your income (position, company, industry, etc)
- your family situation (spouse, kids, other dependents)
- financial obligations other than housing (retirement savings, college tuition, marriages, you get the picture)

Being debt free is a powerful emotional situation to find oneself in. Paying down your mortgage is a step in that direction. Does that appeal to you?

If you can tolerate debt, your income is secure (is it really?), and your financial obligations are well covered, then paying down the mortgage may not be your first priority.

What about opening a discount brokerage account, such as Schwab or others, and investing on your own? Is there a reason you mentioned Edward Jones? Do you have a family member that works there?

Do you know how to create a spreadsheet to calculate net present value of a stream of cash flows? You need this, or you need someone to help you with this.
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      06-13-2020, 11:54 AM   #4
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This pandemic has revealed that no one can take income for granted. Given that risk you may consider paying off a bill that is sure to come vs. the possibility of gains in the stock market.
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      06-13-2020, 11:56 AM   #5
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Agree with Sephiroth. Furthermore, the gains possible in the stock market come with the possible loss of principal. Paying down a loan is 100% certain.

What rate of return, or difference in your portfolio return vs a market index, is Edward Jones guaranteeing you?
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      06-13-2020, 01:22 PM   #6
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      06-13-2020, 01:37 PM   #7
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Quote:
Originally Posted by chassis View Post
Agree with Sephiroth. Furthermore, the gains possible in the stock market come with the possible loss of principal. Paying down a loan is 100% certain.

What rate of return, or difference in your portfolio return vs a market index, is Edward Jones guaranteeing you?
Correct nothing is 100% certain. That's why you don't pay off long term debt and find a better use for your cash. Anything under 3% is free money.

It's all relative though. Depends what op wants to accomplish in life.
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      06-13-2020, 01:55 PM   #8
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Unless you plan to sell the house in the next few years, refi to 15 and invest the rest in index funds.
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      06-13-2020, 02:21 PM   #9
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Unless you plan to sell the house in the next few years, refi to 15 and invest the rest in index funds.
+1.

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      06-13-2020, 02:35 PM   #10
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Never use Edward Jones for investing. Their fees for active management are among the most absurd in the industry (up to 2.5%). Their fees to just use their platform (but no active management) are, again, among the most absurd in the industry (up to 0.5%).
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      06-14-2020, 01:36 AM   #11
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Quote:
Originally Posted by chassis View Post
Lots of subjectivity here, mainly around how you psychologically view debt and your tolerance for debt. The example given above by BimmerDimmer is valid, and one of many ways to look at this.

Factors to consider:
- your age
50
Quote:
Originally Posted by chassis View Post
- your establishment, or not, in your career (accomplishments, clientele, resume)
Pretty established and secure
Quote:
Originally Posted by chassis View Post
- stability of your income (position, company, industry, etc)
Founder, only person in the company with key-man insurance, and was voted #1 risk to the company over this COVID shit. So pretty stable I would say
Quote:
Originally Posted by chassis View Post
- your family situation (spouse, kids, other dependents)
All negative, which is possibly a negative in itself.
Quote:
Originally Posted by chassis View Post
- financial obligations other than housing (retirement savings, college tuition, marriages, you get the picture)
None. I just have to look after me
Quote:
Originally Posted by chassis View Post
Being debt free is a powerful emotional situation to find oneself in. Paying down your mortgage is a step in that direction. Does that appeal to you?

If you can tolerate debt, your income is secure (is it really?), and your financial obligations are well covered, then paying down the mortgage may not be your first priority.

What about opening a discount brokerage account, such as Schwab or others, and investing on your own? Is there a reason you mentioned Edward Jones? Do you have a family member that works there?

Do you know how to create a spreadsheet to calculate net present value of a stream of cash flows? You need this, or you need someone to help you with this.
I'm not the type that has to be debt free. When my Amex card gets over $100K I do start to freak out a bit and pay it down early. But I'm of with having a home loan - just trying to work out what's best.

I already have an account with an agent at Edward Jones - that's the only reason I mention it. I need a managed account as I do not have the interest to learn the markets to invest for myself.

I have done spreadsheets like that - where I fall down is taxes - what's deductible if interest paid, or what's deferred tax etc. Most of the simulations I have done based on my knowledge it seems to come out as a wash, but that's based on the assumptions I have made about earnings on a managed investment account.
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      06-14-2020, 01:37 AM   #12
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Quote:
Originally Posted by Sephiroth View Post
This pandemic has revealed that no one can take income for granted. Given that risk you may consider paying off a bill that is sure to come vs. the possibility of gains in the stock market.
I would say my income is more stable than 99% of people out there. See above, but I am critical to this company, and people could go to jail if I was no longer working there. I think that makes me pretty secure.
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      06-14-2020, 01:39 AM   #13
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Quote:
Originally Posted by chassis View Post
Agree with Sephiroth. Furthermore, the gains possible in the stock market come with the possible loss of principal. Paying down a loan is 100% certain.

What rate of return, or difference in your portfolio return vs a market index, is Edward Jones guaranteeing you?
Exactly, and they're not guaranteeing anything.
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      06-14-2020, 01:41 AM   #14
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People could go to jail if you weren't working there? What the hell are you running over there. Sounds fishy
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      06-14-2020, 01:43 AM   #15
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Quote:
Originally Posted by BimmerDimmer6 View Post
Correct nothing is 100% certain. That's why you don't pay off long term debt and find a better use for your cash. Anything under 3% is free money.

It's all relative though. Depends what op wants to accomplish in life.
My home loan is 3.5% - but I agree. I don't think it's worth paying down, as I feel I can do better with the money elsewhere. Well, not me., Someone who knows what they're doing.

Weird part is I feel like I have a winning lottery ticket in my hand. In 5 years time, I could have 8 figures easily - or could have nothing. In the interim I want to try to make sure that if it swings the way of nothing rather than 8 figures then I will still have a very comfortable retirement.
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      06-14-2020, 01:45 AM   #16
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Quote:
Originally Posted by RickFLM4 View Post
Unless you plan to sell the house in the next few years, refi to 15 and invest the rest in index funds.
Not planning to sell - just dropped $200K into a pool which I won't get back when selling - I plan to be here a while.

But I wonder if the 15 year is "better" long term than just investing and riding out the 30 year to the end. Most of my simulations in Excel are a bit of a wash.
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      06-14-2020, 01:49 AM   #17
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Originally Posted by BimmerDimmer6 View Post
People could go to jail if you weren't working there? What the hell are you running over there. Sounds fishy
It's complicated but not fishy. Due to investment, and recognition of me being a key man in the company, there could be implications if I were no longer there. People who assured the investors that I had no intention to leave could be in a bad place if I left.
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      06-14-2020, 02:10 AM   #18
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Depends on your tolerance for risk and goal for retirement given you're 50s. Do the calculation on how much interest you save over the life of the loan by paying down. It can be an eye popping amount which is a guaranteed return. You can roll the dice and put the money into the market but if you have a time horizon in the next few years, there's no surety that your investment return will be positive when you may need the cash.

You also don't need to know much about the market or investing to justify relying on a high fee brokerage. Get into a brokerage that has no fees and put it into a total market, S&P or other large, low fee index.

You could move into a shorter term loan, but do compare the savings in terms of interest over how long you think you'd have the loan. Having a higher monthly isn't necessarily attractive if there isn't a great interest rate versus something like a 30 year loan. You can utilize additional principle payments or recast the loan if you put a larger amount to principle without doing a full refi. Personally, I prefer a lower monthly because I can always pay more in to shorten the payoff term, but if finances get rough, I can fall back on the lower minimum payment amount.

Or, hedge and split your funds by putting money into both. Consider getting a good tax guy who does certified financial planner work who does things based on hours per consultation and not ongoing fees. They can help run the numbers and give you some scenarios.
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      06-14-2020, 06:09 AM   #19
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Quote:
Originally Posted by dinonz View Post
Not planning to sell - just dropped $200K into a pool which I won't get back when selling - I plan to be here a while.

But I wonder if the 15 year is "better" long term than just investing and riding out the 30 year to the end. Most of my simulations in Excel are a bit of a wash.
Obviously the analysis depends on alternative investment assumptions. Bear in mind, your analysis should contemplate a reduction in risk tolerance for a portion of the investment portfolio as you age. While long term returns are high, they are volatile over the short term.

You started the thread with a question about whether to invest $5K / mo. or use the cash to pay down a 30-yr. mortgage. A 15-year gets you a portion of both. Mortgage paid down sooner with lower interest rate while leaving plenty of the $5K to invest each month for 15 years (and then a lot more after 15 years + 100% equity in home). As others have indicated, it really is a personal choice depending on what you want to prioritize.
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Last edited by RickFLM4; 06-14-2020 at 06:22 AM..
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      06-14-2020, 08:09 AM   #20
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What rate is your mortgage currently at? The potential interest savings obviously pay a big factor in determining if a refinance is best.
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      06-14-2020, 08:39 AM   #21
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Quote:
Originally Posted by BimmerDimmer6 View Post
People could go to jail if you weren't working there? What the hell are you running over there. Sounds fishy
Don't ask me about my business. Don't ever ask me about my business.

Oops, sorry. Wrong thread!

My $0.02 from the perspective of having 6 years left on my 2.75% 15-year mortgage and a serious health condition where I could wind up on permanent disability...or DEAD...overnight is that I am throwing every single free penny at the mortgage until it is paid off. Why? So that I can die knowing that my wife will always have a roof over her head, and it will only cost her about $450/month in taxes and utilities.....
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      06-14-2020, 09:37 AM   #22
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Quote:
Originally Posted by AlpineWhite_SJ View Post
Depends on your tolerance for risk and goal for retirement given you're 50s. Do the calculation on how much interest you save over the life of the loan by paying down. It can be an eye popping amount which is a guaranteed return. You can roll the dice and put the money into the market but if you have a time horizon in the next few years, there's no surety that your investment return will be positive when you may need the cash.

You also don't need to know much about the market or investing to justify relying on a high fee brokerage. Get into a brokerage that has no fees and put it into a total market, S&P or other large, low fee index.

You could move into a shorter term loan, but do compare the savings in terms of interest over how long you think you'd have the loan. Having a higher monthly isn't necessarily attractive if there isn't a great interest rate versus something like a 30 year loan. You can utilize additional principle payments or recast the loan if you put a larger amount to principle without doing a full refi. Personally, I prefer a lower monthly because I can always pay more in to shorten the payoff term, but if finances get rough, I can fall back on the lower minimum payment amount.

Or, hedge and split your funds by putting money into both. Consider getting a good tax guy who does certified financial planner work who does things based on hours per consultation and not ongoing fees. They can help run the numbers and give you some scenarios.
Currently I have $1.5M in an investment that's paying out a 10% return (which is why I have at least $5K a month to reinvest) however that's not growing - it will remain as $1.5M. And I have about $1.1M in cars that will probably be liquidated when I retire, so I have a good retirement base, I just want to bump it up to give me more years or more money to enjoy.

I've looked at how much interest I could save, and compared it to how much my investment could grow, tried to weigh in the fact that I can claim the interest off my tax etc. and still not really determined the ideal.
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