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pay off mortgage or invest?

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pay off mortgage or invest?

Old 09-12-07, 09:49 AM
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pay off mortgage or invest?

basic information:
* We have a 15 yr loan at 6.5% which we have 13 years left on.
* We put 20% down.
* We already max out 401(k)s, IRAs, and Roth IRA's, emergency fund ( Dave Ramsey)
* We bought a cheap house and are currently DINK.
* If we get pregnant I plan to stay home with the kids. (been trying for 2 yrs now though)
* We're coming into a decent sum of money which would allow us to pay off the house.

My husband and I are debating whether or not paying off the house makes the best financial sense. If we have kids, I don't want to live paycheck to paycheck. We haven't been for almost 3 years, and I don't really want to start, especially with a kid in the mix. I need financial stability. I grew up on government cheese

My thoughts are any tax benefits from the mortgage are offset by a pretty large reduction in our family income, and by a child credit.

He just sent me an article about how the money should instead go into a 529K and earn interest or something. But if we pay off the house, we'll have extra money each month to invest.

Be our financial advisers...tell me I'm right
Old 09-12-07, 09:53 AM
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I'd invest, but I'm no expert.....
Old 09-12-07, 09:53 AM
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I'd also set up a 529 account.....
Old 09-12-07, 09:55 AM
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Keep the mortgage and invest the money. A mortgage is deductible and you can make money on the other money.

If you had a 30 year I would say refinance it to a 15 but you already have a 15.

Make 2 mortgage payments a month (split them) so you pay off the mortgage that much quicker (11 years I think).

If you invest it you can use that income to not live paycheck to paycheck while you are home with the kids.

A house is positive debt. You may even want to consider an investment property depending on where you live. If your renters can come close to paying the mortgage it is a no brainer. They pay and you reap the benefits after the mortgage is paid off.
Old 09-12-07, 09:56 AM
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This is a classic argument with no right or wrong answer. It really comes down to how confident you are that you can beat your mortgage rate (6.5%) with investing. Over the long term, its likely you can achieve that, so generally investing is considered a "smarter" choice. Plus you have liquid assets so if for some reason you do need the money, its sitting out there and available to you, not tied up in equity in your house. Though you can always take a HELOC or something to get the equity back out of your house in a pinch.
But there is a certain satisfaction and ease of mind in knowing that your house is paid off, and its a guaranteed 6.5% return with no effort, market watching, temporary panic when the market takes a downturn (like it did several weeks ago).

So really, its up to you. Technically its probably smarter to invest it, but paying off the house isn't a critical financial error or anything.
Old 09-12-07, 09:59 AM
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What are your ages? Sounds like you are young, so maxing out the stuff that you do should be plenty assuming you keep doing it. Although that might get tougher if you go down to one income. It really depends on how much you want to have when you retire. The mortgage interest deduction is nice and the child credit is only $1,000 per child, but at least it comes as a direct credit to tax, not just a deduction to taxable income.

Depending on the amount you have coming in, I would probably at least pay off some of the house. Maybe split it. Hard to really say without knowing the exact monetary details.

I'm not too familiar with the 529s. Can you set them up before a child is born?

If you stop working, make sure to get a pretty nice amount of term life insurance on your husband.
Old 09-12-07, 10:02 AM
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Originally Posted by SoSpacey

If you invest it you can use that income to not live paycheck to paycheck while you are home with the kids.
That is kinda dangerous since short-term investing is much riskier than long term. If you do invest it, I would consider it investing for retirement, not for income in the near future.
Old 09-12-07, 10:03 AM
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We're coming into a decent sum of money which would allow us to pay off the house.
I think the critical question is how much would be left after the payoff (you obviously don't have to answer this here )? Is it possible to do both? Maybe you could make a one time payment (of say 1/2 the outstanding balance) and then take the rest and invest that. That should decrease the overall life of the loan plus allow you to start earning on the amount invested (assuming of course you invest it right ).
Old 09-12-07, 10:05 AM
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Originally Posted by cdollaz
What are your ages? Sounds like you are young, so maxing out the stuff that you do should be plenty assuming you keep doing it. Although that might get tougher if you go down to one income. It really depends on how much you want to have when you retire. The mortgage interest deduction is nice and the child credit is only $1,000 per child, but at least it comes as a direct credit to tax, not just a deduction to taxable income.

Depending on the amount you have coming in, I would probably at least pay off some of the house. Maybe split it. Hard to really say without knowing the exact monetary details.

I'm not too familiar with the 529s. Can you set them up before a child is born?

If you stop working, make sure to get a pretty nice amount of term life insurance on your husband.
I'm 31, he's 41.

We already bought the term life plan when we started trying to get pregnant. I'm serious when I say I need financial security. My fear was what if I get pregnant and the following week something happened to him? All our plans of how we wanted to raise our children would be gone without insurance.

I like to plan based on worst case.

I have way more in my 401(k) than my husband because of this.

And you can't start a 529 before a kid is born. We would already have one if you could (I asked)
Old 09-12-07, 10:08 AM
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Forgot to say earlier: we live debt free... except the house. If the mortgage is gone, we would have absolutely zero debt.
Old 09-12-07, 10:11 AM
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I am a fan of having a certain amount of liquidity, so unless I would have a decent chunk left over after paying off the house, I probably wouldn't totally pay it off. You could always sell the house if it came down to it, but who wants to have to sell their house. Making double payments now while it is easily doable is probably a good option.
Old 09-12-07, 10:17 AM
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Depends - do you get hit with AMT (Alternative Minimum Tax) if so you may want to pay off the house... because you are not getting the full benefit of deductions from having the loan.

If you invest the $ you need to pay tax on the earnings - which could bump you into a higher tax bracket.

The security of having a house paid off and only having to pay taxes is a great feeling and will help ease your income crunch if you decide to stay home.....but liquid cash always helps.

Good luck with that decision.
Old 09-12-07, 10:19 AM
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Personally I would pay off the house. I would write that check in about 2 minutes. I realize I'm probably in the minority with that opinion, and I am certainly no expert. FWIW, my reasoning is...

#1 you already max out retirement and have emergency fund so why invest? Not that investing is bad, but you need to have a reason/goal behind investing. If the goal is just to pile up money, you can be more productive by saving/investing your regular monthly house payment amount after paying off the morgage. Plus you get to save that 6.5% you've been giving to the bank every month. (Yes, I know it's a tax deduction but you pay out more to the bank than you save from the gov't)

#2 IF something comes up and you need money you don't want it all in long term investments. It is much safer knowing you can draw on home equity, or just use your emergency fund which should be in a simple money market account or something like that where you can get at it without penalty or risk of pulling it out during a downturn in the stock market.

Again, JMHO, but I would pay off the house and I wouldn't even give it a 2nd thought.
Old 09-12-07, 10:24 AM
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Originally Posted by mosquitobite
Forgot to say earlier: we live debt free... except the house. If the mortgage is gone, we would have absolutely zero debt.
It sounds like the mortgage payment is manageable for you, like a utility bill. I would look at the investment option: if that works out well for you you could always use it to pay more/pay off your mortgage.

(Obligatory): Must be nice.
Old 09-12-07, 10:27 AM
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I'm no expert, but I say you diversify. reduce your mortgage payment (conservative), and invest some of it (more risk).

Invest for now, and wait a bit for interest rates to go down, and refi at a lower rate and some cash to lower payments to a more comfortable level on one income.

(Playing with other people's money is fun, but humbling )
Old 09-12-07, 10:30 AM
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The two key words that sparked my attention were DINK and government cheese. Other than that, I got nothing.

Whatever skeet wants to do should be fine, she knows about that money for a rainy day stuff.
Old 09-12-07, 10:30 AM
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Originally Posted by cdollaz
I am a fan of having a certain amount of liquidity, so unless I would have a decent chunk left over after paying off the house, I probably wouldn't totally pay it off. You could always sell the house if it came down to it, but who wants to have to sell their house. Making double payments now while it is easily doable is probably a good option.
Our emergency fund is well over what we would need to survive for 6 months with BOTH of us out of jobs. We have liquid cash, and if we paid off the mortgage it would be even more so since that'd free up what we used to pay in mortgage payments. Also, the emergency fund would last longer since we would no longer have any payments except utilities and other necessities.

We could both lose our jobs today and still make ends meet by one of us working at McDonalds. Skeet is CHEAP.

With current retirement investment amounts we will be fine in retirement...especially...again with a paid off house.
Old 09-12-07, 10:34 AM
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Originally Posted by wishbon3
It sounds like the mortgage payment is manageable for you, like a utility bill. I would look at the investment option: if that works out well for you you could always use it to pay more/pay off your mortgage.

(Obligatory): Must be nice.
Currently, our mortgage works out to 7% of our annual income.
If I quit working of course, it doubles to 14%.

I said in the post we bought a cheap house

move to Indiana!
Old 09-12-07, 10:36 AM
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Originally Posted by mosquitobite
Our emergency fund is well over what we would need to survive for 6 months with BOTH of us out of jobs. We have liquid cash, and if we paid off the mortgage it would be even more so since that'd free up what we used to pay in mortgage payments. Also, the emergency fund would last longer since we would no longer have any payments except utilities and other necessities.

We could both lose our jobs today and still make ends meet by one of us working at McDonalds. Skeet is CHEAP.

With current retirement investment amounts we will be fine in retirement...especially...again with a paid off house.
Sounds like you answered your own question.
Old 09-12-07, 10:36 AM
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Based on the way you talk about needing financial security, not big on risk, and the fact that you listen to Dave Ramsey, you need to pay off the house. You already max out the rest, so you have your investments. And if you want to invest more, you can from the money you don't spend on mortgage. But now you have the option of not paying a mortgage and having more money at the end of the month if you need it without dipping into the emergency fund.
Old 09-12-07, 10:40 AM
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Is this CHEAP house small?

Because if you want to have kids you may want to use this $ on a down payment on a larger house so that you have more room for a growing family.
Old 09-12-07, 10:40 AM
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Originally Posted by cdollaz
Sounds like you answered your own question.
Oh, I know what I WANT.

I need someone to take my husband's side and tell me why I'm WRONG.

I'm a logical person. If someone can walk me through why investing is the smarter choice - based on crunching some cold hard numbers (make them up if you have to) - my mind could be swayed.
Old 09-12-07, 10:40 AM
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The only solution is to invest everything into the potato market. Open margin accounts so you're not even using your own money.
Old 09-12-07, 10:43 AM
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Originally Posted by CPA-ESQ.
Is this CHEAP house small?

Because if you want to have kids you may want to use this $ on a down payment on a larger house so that you have more room for a growing family.
Some might consider it small I guess. It's a 1300sq ft ranch with a .3acre fenced back yard. It has a full unfinished basement that gives us room to grow. We like the location and the house, no plans on moving. My parents raised 4 of us in a 1600sq ft house and I don't ever remember feeling it was too small.

Our priorities aren't a big fancy house and nice cars.

I drive a 2001, my husband drives a 1997.
Old 09-12-07, 10:44 AM
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Originally Posted by CPA-ESQ.
Is this CHEAP house small?

Because if you want to have kids you may want to use this $ on a down payment on a larger house so that you have more room for a growing family.
Those kids can live in a closet. We're talking money here!


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