3.8 rate on mortgage. Pay lump sum or invest?

[maggiehanley]

I owe 280k on my 3.8 fixed rate 30 yr mortgage. Would paying the max yearly lump sum be wise, or investing? I am a single Mom, just divorced and new to financial planning. I can't pay off my mortgage but I could pay a 10% lump sum this year.

If investing is wise, what sort of investment would yield the highest return?

Thank you.

 

[lalaland777]

@maggiehanley Do you have other assets? Do you have an income? In most cases, paying off the mortgage isn’t ideal. Especially now when you can make 5% on your savings without risk.

 

[maggiehanley]

@lalaland777 I have 60k in savings. 60k in retirement account. I will get federal employee pension and social security retirement but I am only 40 now, I have a 25k travel trailer and 100k+ in equity. I make 47k/yr and will get 1460/mo in support for 7 years. I just want to be stable and a solid secure home for my kids.

 

[resjudicata]

@maggiehanley I’d consider investing for your future and to have more available in retirement and for expenses.

 

[maggiehanley]

@resjudicata What if a person doesn’t expect to live past retirement age?

 

[resjudicata]

@maggiehanley The retirement savings And home equity is passed to your estate and beneficiaries.

 

[maggiehanley]

@lalaland777 Also, thank you for your response.

More info-

My mortgage payment is 1760/mo.

 

[completeme]

@maggiehanley Invest! Why pay off a low interest loan like that when u can invest it and hopefully get a better return. Even a HYSA will pay u more. Maybe just our little extra towards mortgage every month.

 

[maggiehanley]

@completeme Thank you for your response. What kind of investment would you go for?

 

[dayboivietnam]

@maggiehanley Just stock market index funds like SPY will be fine

 

[completeme]

@maggiehanley Talk to a financial advisor. U can’t be asking people in here for advise like that. Advisor will review everything and set up a plan of action.

 

[9ikanews]

@completeme Majority of people calling themselves financial advisors are non fiduciary predators that take advantage of people like op.

Do not pay anything extra towards mortgage. Open a High Yield Savings Account or Money Market account at an online bank such as Ally or similar. Put the lump sum there as well as your emergency fund money. It should be making you over 4% interest while you decide how to invest.

Educate yourself on basics of financial planning. It's easy to make a mistake when you know very little. There are plenty of videos, books and podcasts on the subject. Only then you can decide if you need a real financial advisor.

 

[logicalthinker123456]

@completeme HYSA... After taxes tho? It's basically a wash or worse if they are making enough to pay that much on the mortgage. Maybe CDs for the tax treatment

 

[jics]

@maggiehanley You're right on the edge of that decision. Anything 4% and above should definitely be paid off especially with the tax incentives taken away.

 

[maggiehanley]

@jics What tax incentives? I’m not very financially savvy

 

[jics]

@maggiehanley Before the 2017 tax cuts and jobs act there was more of an incentive to carry a mortgage. Now that that tax incentive was tkem away the tipping point on when you should pay your mortgage off vs investing has come down from a high 4% to a high 3%. Use a mortgage calculator and a compounding interest calculator side by side and input your extra payments into both and see how much you save until the loan finishes to figure out the best option. I use a conservative 7% return on my calculations.

https://taxfoundation.org/blog/mortgage-interest-deduction-tcja/

 

[maggiehanley]

@jics Thank you. That makes sense. Is it smarter to rent now?

 

[lisneige]

@maggiehanley To expand on this, it depends a bit on your tax filing status and income level. Do you itemize deductions at tax time or take the standard deduction? The single standard deduction is ~$13k. So if you’re mortgage interest is less than $13k the mortgage interest provides no tax benefit.

If you’re taking the standard deduction than you need to divide your mortgage rate by your take home rate after marginal tax rate to see your break even point. For example, let’s say you’re in the 24% federal bracket and live in an area with no state or local tax. 3.8/0.76=5%. So you need to find 5% just to break even. If say you have 5% state and local tax than that number jumps up to 5.35% (3.8/0.71). That’s right around where risk free investments are. So it’s somewhat of a push.

Now if you’re willing to rinse more risk, the broader market averages higher returns. Personally I’m a fan of owning home outright. I recently finished paying off my 4% mortgage. Since you already own a home with a low mortgage, I wouldn’t suggest selling it to rent. I’d look to stay at your current house as long as you can afford it and it meets your needs

 

[thejimmy]

@maggiehanley I think that one thing that a lot of people on this forum overlook is the fact that even if someone has a mortgage, they may still be taking the standard deduction and not getting any tax break. So while the interest rate on the mortgage is low, and current rates on HYSAs are relatively high, the HYSA earnings will be taxed so the difference between the two is narrowed. In this case, the interest on the savings is still likely to be greater even after taxes, but the gap is narrowed.

I agree that it makes sense to have a "diversified" asset base with some investments, savings, home equity, and so on. But some people will just mentally prefer to be debt free and maybe overweight their allocation towards debt even is it isn't the wisest choice when looking at it from a straight mathematically approach.

 

[maque05]

@maggiehanley What age are you and your kid(s)- I think staying liquid is more important until you can really build up a big payoff lump. You could do that in a HYSA for a few years and keep it as emergency and test the waters before. You never know what can happen in life. If your child is school age or going to college - there can always be crazy random stuff pop up there too.