My Mortgage Dilemma – Prepay or Invest
It’s not quite so easy as it sounds. To some folks, they can immediately answer one way or another. If your interest rate is below 8.5% (I learned this by reading Pinyo’s analysis of prepaying your loan vs. investing at Moolanomy), depending on things like inflation and how well the stock market does, you’ll almost always come out ahead investing your money. Read that article and all the ones he links to at the bottom and you’ll get a real education on prepaying vs. investing.
At first, reading that article made me kind of depressed. Until early this year, I was paying an extra $100 toward the house payment each month. I didn’t stop paying it because I knew it would be better to invest the money, instead I stopped paying it when I realized it didn’t make sense because Melissa and I had already committed to buying a new house. That extra hundred went into investments in preparation of the new home.
But now, after reading all those articles, and doing some more thinking myself, I don’t feel as bad about my prepaying the mortgage. Sure, I could have made even more money if I hadn’t spent years investing that extra monthly $100 into the house. But sometimes personal finance is more than just seeking the absolute highest returns, or the absolute best interest rate, although I do see those as fantastic goals. At some point, you need to balance this with your personal level of acceptable risk, and balance it with your personal values.
Because we are moving (hopefully before the end of the year if the house is finished), I have to face this decision again. The financial part of me says invest anything you might have otherwise considered paying toward the principal. But there is another part of me that says that the house is a physical asset that can’t be taken away from me once I own it.
I’m going to have find a balance between my desire to own my house outright, and my desire to increase my net worth so I can retire early.
Even though something can make so much sense when you “do the math” or “look at the numbers”, it doesn’t always calculate when you take all the factors into consideration. What If I lose my job? That puts my house at risk because I don’t own it outright. What if we go through a bad recession? That could reduce the amount of return I’d make on my investments. What if we experience high inflation rates? Again, this can affect my savings and investments, but real estate tends to fare better against inflation.
Because we are getting an 80-10-10 loan (we are paying 10% down, getting one loan for 80%, and another loan for 10%), I am considering paying down the 10% loan aggressively. It will be at a higher interest rate and therefore costing me more in interest. Once the second loan is paid down my overall house payment will immediately drop. This extra money will go directly into investments. I think this way I can balance my desire to pay down my mortgage more quickly (even though I’ve still got 30 years left on the 80%), and my desire to invest more of what I bring home.
Image source tofslie