Mortgage/Investing Strategy

**mrpaseo** · 03-18-2012, 01:27 PM

First off, congratulations on your financial footprint, you seem to be doing quite well. I'm sure many will have questions and comments but I wanted to put my two cents in.

If you personally feel uneasy about the market (I don't blame you) for the next 24 months but you don't want to to invest all your money into your house. What about dividing your extra cash into 24 equal amounts and making equal payments over the next 24 months? This will keep some money in your pocket and will pay the house off in two years.

Frankly, a 15 year loan at 3.375% is a good deal. With my situation (Approaching a career change) I too had issues with investing into the market, I opted to pay off the house. I have not regretted that decision for even one second and I am not even close to your situation in being financially stable.

Great job, best of luck,
Ray

**jddungan11** · 03-18-2012, 01:38 PM

math is not magic

From what you stated:
Your mortgage interest rate is higher than your personal investment return. So, mathematically speaking, you are better to pay off the mortgage (-3.xx%) earnings versus a +2% earnings in the market/investing.

However, in your shoes, I would find a personal financial advisor (like JP Edwards, and no I do not use them, its just the only one I know of... not recommending them either way!) because they typically can diversify enough to get you upwards of 10% earnings... in which case you beat the mortgage rate.

Additionally, a tax advisor could explain the benefit of paying a homestead or not..

**disneysteve** · 03-18-2012, 02:12 PM

Originally posted by hunt8405 View Post

I have a household income of around 500k per year.

My wife and I are maximizing no brainer investments like maxing out our 401k's, IRA's, and significant contributions to our company stock purchase plans.

My investments in the market haven't done that great (around 2% growth in my portfolio in last 16 months)

I'm leaning toward trying to pay my house off now as my confidence in investing in the market over the next 24 months is quite low. Then I would get more aggresive in the market when the markets are in a worse off place than now (I realize it is hard to forecast or time market corrections).

What percentage of your gross income are you currently investing for retirement? What percentage are you saving for other purposes? How large of an emergency fund are you maintaining?

What percentage of your portfolio is in company stock?

I'm concerned that your investments have only earned a 2% return over 16 months at a time when the market has been doing reasonably well. The S&P 500 Index is up about 5% over the past 12 months. Total Stock Market Index is up 4.5%. Total Bond Market Index is up 8.3%. Where do you have your money that you've only earned 2%? I'd be taking a real good look at my allocation and specific investments because you are significantly lagging the market.

The effective after-tax rate on your mortgage is less than 2.5%. I don't think I'd be dumping money into that. You can easily outperform that with your investments. That's not to say I wouldn't throw some extra money at it if you want to but I wouldn't go all in to it. Maybe do what mrpaseo suggested and pay it off over the next 2-3 years while also adding to your investments along the way.

**disneysteve** · 03-18-2012, 02:16 PM

Originally posted by jddungan11 View Post

I would find a personal financial advisor (like JP Edwards, and no I do not use them, its just the only one I know of... not recommending them either way!) because they typically can diversify enough to get you upwards of 10% earnings

I'm not sure where you got that idea but I wouldn't count on any adviser getting you a 10% or higher return. A total stock market index fund returned about 4.5% over the past 12 months. There's no way an adviser would have gotten you more than double that return, especially when you knock off 1% or more for fees.

**greenskeeper** · 03-18-2012, 02:58 PM

hunt8405

I'm the same age as you (32) and if I had cash to pay off my mortgage in a single year I would do it without thinking twice.

In fact, the mortgage is our only debt and we are on track to pay off our 30yr note in 12yrs (by 2019)

**disneysteve** · 03-18-2012, 03:36 PM

Originally posted by greenskeeper View Post

I'm the same age as you (32) and if I had cash to pay off my mortgage in a single year I would do it without thinking twice.

I'm 47 and have the cash to pay off our mortgage at any time. We choose not to due to the low rate.

Different strokes....

**hunt8405** · 03-18-2012, 04:15 PM

I appreciate all the feedback

Thanks for all the thoughts everyone. If I could make 10% (or even 5%) with some level of certainty I would do it in a second. These are numbers I just haven't seen, except in a handful of stocks I have individually purchased. The broker I'm working with has me in a diversified portfolio that includes small caps, large caps, international, commodities, etc. My portfolio has been drug down by international and commodities, despite the dow doing suprisingly well. Overall I got around a 2% annualized return after paying brokerage fees over the last 16 months.

Here is some more background information to answer Steve's questions. Currently, I have 120k in cash (I really just want around 50k for a security fund) and gross on average 42k per month with a $2,200 a month mortgage including taxes etc. I max out my 401k each year (for me and my wife) which 15,500 per year. I put 10% of my income in my company's stock purchase plan (I'm able to buy at a 15% discount off of the 6 month low). I just sold 22k in that stock so I don't get too heavy in my company's stock.

Looking forward, I'm feeling like there might be a little more upside with the US market, however the probability of a market reset seems to really make me feel like it may be a good time to be a little more conservative.

My quandry is that I've worked so hard to get where I'm at. I tend not to trust brokers because I feel as though their model is flawed from the investors point of view. There is just too much money to be made on their end, and they don't have real skin in the game when we as investors see losses. In my experience I've felt that their primary goal is just to build their book of business, meaning a primary focus on just getting more customers versus strategically/organically growing each portfolio.

**disneysteve** · 03-18-2012, 04:44 PM

Originally posted by hunt8405 View Post

The broker I'm working with

I tend not to trust brokers because I feel as though their model is flawed from the investors point of view.

So why are you working with a broker?

A super-simple portfolio of total stock index, total bond index and total international index would probably outperform the broker with far lower costs. Heck, a target retirement fund would have earned you about 2% with an expense ratio of only 0.19%. I'm betting the broker charged a whole lot more.

**Petunia 100** · 03-18-2012, 04:48 PM

Originally posted by hunt8405 View Post

Thanks for all the thoughts everyone. If I could make 10% (or even 5%) with some level of certainty I would do it in a second. These are numbers I just haven't seen, except in a handful of stocks I have individually purchased. The broker I'm working with has me in a diversified portfolio that includes small caps, large caps, international, commodities, etc. My portfolio has been drug down by international and commodities, despite the dow doing suprisingly well. Overall I got around a 2% annualized return after paying brokerage fees over the last 16 months.

I suggest you think about what you have written here. You are on to something.

Over the long term, it is extremely difficult to beat the index. Happily, there are ways to buy the index and pay rock-bottom expenses. For example, Vanguard's Total Market Index ETF VTI has an expense ratio of .07%. You can buy it with no commission at many brokerage houses. You are guaranteed market returns less the expense ratio.

As to your original question, I think it depends. You can easily do better investing your money than prepaying a 3.375% mortgage. But if it would make you happy to pay it off, then go ahead. You're going to be fine either way.

**disneysteve** · 03-18-2012, 04:53 PM

Originally posted by Petunia 100 View Post

You're going to be fine either way.

I agree. In the grand scheme of things, over the long run, it isn't goin to matter which way you go. You've got a huge income and taking one year to pay off the loan and then investing from there won't make any difference 30 years from now.

**hunt8405** · 03-18-2012, 05:02 PM

Thanks guys!

I appreciate the responses. I actually planned on making a call to my broker in the morning to end our business together. He's just not worth the cost. I'm going to pay off the house over the next 12 months then re-evaluate investments other than 401k and ESPP. Thanks. For all the posts

**ecoadapt** · 03-18-2012, 07:00 PM

With your current financial status, I believe that what others said, there's no difference looking after 30 years or so. But, I think I'll be paying the mortgage first!

Mortgage/Investing Strategy