Pay off debt during down market?

[ua_guy]

That $495,000 mortgage is kind of a no brainer for me. if you just stick to the standard mortgage payments and duration, you will have paid nearly $750,000 for that home, plus whatever down payment you put on it.

Cut that payoff time by 1/4, 1/3 or half and you will realize huge savings in interest paid. Further .... do you really still want to be paying for that home (27) years from now?

No, but that was never the plan to hang on to the mortgage for a full 30 years. We're on a strategy to pay it down in about 10 years, but we are also saving for retirement in the meantime. I just wondered if there's any mathematical sense in putting even more towards mortgage payments versus retirement. Our annual return on retirement investments is between 1-2% for all funds combined for 2015, so it seems like it would make sense to channel even more income to the mortgage instead of investments because the money we put in (pre-tax) investments appears to be costing us money given our annual return, and the interest rate of the existing mortgage.

Whats debt? Im 32 and thats not a word in my vocabulary.

Don't own a house? Or paid cash for one?

[autoxer]

Whats debt?

It's leverage.

[autoxer]

I just wondered if there's any mathematical sense in putting even more towards mortgage payments versus retirement. Our annual return on retirement investments is between 1-2% for all funds combined for 2015, so it seems like it would make sense to channel even more income to the mortgage instead of investments because the money we put in (pre-tax) investments appears to be costing us money given our annual return, and the interest rate of the existing mortgage.

For 2015 that was true, but not for 2014, 2013 or 2012. So how accurately can you predict 2016's return?

[LivingAlmostLarge]

you can't. But life's about balance. Depends on if all your buckets are full and you have nothing else you want to save for.

[autoxer]

No matter the market conditions, you are best suited by paying off the loan because you eliminate all of the (more dangerous) "what ifs." At least you know your return, and you're not wringing your hands hoping for a glamorous outcome that is out of your control.

I certainly understand that it is risky, watching my portfolio drop 7% over the past two weeks, but personally it doesn't feel as risky with a long term outlook.

I was just reviewing my cash flow for the previous year and I figured out that I put 25% of my gross income directly into the stock market, between my 401k, ira, 529 and brokerage accounts. I could easily redirect all of that to paying off my mortgage and have it done in three years, but I know that isn't the best thing for my long term net worth growth.

I have also been considering taking out a 30 year mortgage on my next house, so that I can keep more cash liquid. If I only plan to live there for ~20 years, then what's the point in paying it down quicker?

[Nutria]

No matter the market conditions, you are best suited by paying off the loan because you eliminate all of the (more dangerous) "what ifs." At least you know your return, and you're not wringing your hands hoping for a glamorous outcome that is out of your control.

You sound like my father, who's parked his money in MM funds for decades while missing an epic market run.

http://finance.yahoo.com/echarts?s=%5Egspc+interactive#{"range":"10y","allowChartStacking":true}

[Nutria]

I would say - don't try to time the market.

That is a good point.

[clatoden99]

I think it's dangerous to make a blanket statement that debt consolidation is the best option out there. It's absolutely true that debt consolidation is the best option for a lot of people who are deep in debt, but it is not the best option for every debtor out there.

[james.hendrickson]

Dump the debt.

[dczech09]

You sound like my father, who's parked his money in MM funds for decades while missing an epic market run.

Clearly you are mistaking me for someone else. I am a HUGE proponent of investing in the stock market. I am even telling people to stay invested during these tough market times. In fact, I do not have a single dollar invested in money market mutual funds. At the age of 28, and can (and do) accept market risk with my investments.

My argument has been that paying off debt is more advantageous in any market condition, especially a down market. I do not advocate investing with borrowed money. In a sense, investing while having debt laying around is investing with borrowed money.

At least when you pay down your debt, you know your rate of return (which is equal to the debt's APR). Whereas when you invest, you will not know your rate of return until you get there. There is uncertainty.

With all of that being said, I do recommend that people start investing for retirement even if they have a small (and manageable) amount of debt. For example, a recent college grad making $50,000 per year and having $20,000 in debt ought to invest at least a little for retirement while paying off debt. But I do not recommend this as a means of trying to arbitrage return rates, but instead to build up a positive habit.

Chasing higher returns on investment in the hopes of outpacing debt is a foolish, and dangerous game. And that is what I am against. The whole "hey, I am paying 4% on my debt, so why don't I invest my extra money and try to make 8%?" That type of thinking ignores so many other variables.

[Randomsaver]

To me it's rid debt first. The reason is we don't know if health, job, marriage, etc. stays as is. If one can see the future and the answer is they stay as is or even improve, then certainly 401k.

For me, suppose I lose my job tomorrow and it took me a year to get another job. For 401K, there's no penalty, I just stop contributing. But for debt especially mortgage, I get hit with penalties and risk of losing it all via foreclosure.

[bjl584]

Personally, I've always focused on paying off debt AND investing simultaneously. I never paid attention to market returns versus interest rates on debts.

[LivingAlmostLarge]

I think it depends on your risk tolerance. There is no right answer.