# Lifestyles & Discussion > Personal Prosperity >  Is it better to pay off a 3% mortgage or invest the money elsewhere?

## Schifference

Lets suppose that you pay 22% in Fed tax, 5% State tax, & 7.35% payroll tax and have a mortgage of $348,792. You did not put 20% down so you pay mortgage protection insurance. The principle, interest, & mortgage insurance is $1883.43 per month. Property tax & homeowners insurance are not included. In order to pay $1883.43 you would need to earn $34,450 income. If you invested your $348,792 at 11% you would gross $38367.12 per year. Fed & State taxes on the investment would be $10,359. Your 350k investment would also be diminished by the rate of inflation. 

It seems that paying off the 3% mortgage would equate to not having to earn $34,450 per year. The investment that you want to use to pay your mortgage would net $28008. 

Is it wiser to pay off the mortgage or invest the cash?

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## ILUVRP

i learned in college a investment is --a return on your money and a return of your money , everything else is a speculation --.

i know of no place where you can get a safe 11% return on money .

also you did not say anything about the tax write off of the mtg -taxes-interest which at  27 percent would look like about 2.19  percent.

i would keep the 3 percent mtg , with your low down payment ( lets say 10 percent ) you have about $35,000 in the house , if the value of the house goes up 1 percent ( 3500 $ ) a year on your $35k you will be getting 10 percent tax free.

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## Schifference

> i learned in college a investment is --a return on your money and a return of your money , everything else is a speculation --.
> 
> i know of no place where you can get a safe 11% return on money .
> 
> also you did not say anything about the tax write off of the mtg -taxes-interest which at  27 percent would look like about 2.19  percent.
> 
> i would keep the 3 percent mtg , with your low down payment ( lets say 10 percent ) you have about $35,000 in the house , if the value of the house goes up 1 percent ( 3500 $ ) a year on your $35k you will be getting 10 percent tax free.


The interest portion to write off is pretty small. The property tax is able to be written off regardless of whether a mortgage exists or not. Already committed to the house and any increase in appreciation is tax free regardless.

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## Cleaner44

It really depends on the investment and how solid it truly is.  Personally I would prefer to own the home and not have the mortgage.  The risk is lower and the peace of mind can't be replaced.

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## KingNothing

Pretty simple.  You take the 11-percent investment, every time.

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## oyarde

> Lets suppose that you pay 22% in Fed tax, 5% State tax, & 7.35% payroll tax and have a mortgage of $348,792. You did not put 20% down so you pay mortgage protection insurance. The principle, interest, & mortgage insurance is $1883.43 per month. Property tax & homeowners insurance are not included. In order to pay $1883.43 you would need to earn $34,450 income. If you invested your $348,792 at 11% you would gross $38367.12 per year. Fed & State taxes on the investment would be $10,359. Your 350k investment would also be diminished by the rate of inflation. 
> 
> It seems that paying off the 3% mortgage would equate to not having to earn $34,450 per year. The investment that you want to use to pay your mortgage would net $28008. 
> 
> Is it wiser to pay off the mortgage or invest the cash?


How are you getting the 11 % ? Unless it is a pretty sure thing , I would just pay an extra $100 a month against the principal on the house and keep making the payment. I have a couple loans I do not care much about , one @ 4% on a home , one @ 5 % on a used vehicle ( about $15 a month interest on the auto , I could have pd it off , but decided I would rather keep the cash for other things). Making 8 to 11 % on an investment , consistently is tough these days.

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## Schifference

> How are you getting the 11 % ? Unless it is a pretty sure thing , I would just pay an extra $100 a month against the principal on the house and keep making the payment. I have a couple loans I do not care much about , one @ 4% on a home , one @ 5 % on a used vehicle ( about $15 a month interest on the auto , I could have pd it off , but decided I would rather keep the cash for other things). Making 8 to 11 % on an investment , consistently is tough these days.


I agree that making 8-11% is tough. Presently we are paying the tax man like 20k. I work but a large percentage of my wage goes to the taxman. If mortgage was paid off I could tinker and do what I want and pick up some needed cash. Some other thread stated the S&P averaged 11% don't really care if that is accurate or not. Point is I have to earn 35k to pay just Principle, Interest, and mortgage insurance. What would you do with the 350k if you did not pay off the house? What better investment is out there?

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## oyarde

> I agree that making 8-11% is tough. Presently we are paying the tax man like 20k. I work but a large percentage of my wage goes to the taxman. If mortgage was paid off I could tinker and do what I want and pick up some needed cash. Some other thread stated the S&P averaged 11% don't really care if that is accurate or not. Point is I have to earn 35k to pay just Principle, Interest, and mortgage insurance. What would you do with the 350k if you did not pay off the house? What better investment is out there?


I see , so , suggestions of investing 350K for the best and safest return ? Interesting.

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## Seraphim

This is terrible advice.

You conclude that through which metrics that price risk of principal on the money you invest for said 11% return?

The 11% yielding investments these days are HYPER risky. You risk A LOT of principal. Paying off the 3% mortgage GARUNTEES lower debt and reduces exposure to any future rises in interest rates.

You don't take the 11% every time. Unless you're a riverboat gambler.




> Pretty simple.  You take the 11-percent investment, every time.

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## oyarde

Well , I would most definitely stay clear of the S & P .

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## oyarde

> This is terrible advice.
> 
> You conclude that through which metrics that price risk of principal on the money you invest for said 11% return?
> 
> The 11% yielding investments these days are HYPER risky. You risk A LOT of principal. Paying off the 3% mortgage GARUNTEES lower debt and reduces exposure to any future rises in interest rates.
> 
> You don't take the 11% every time. Unless you're a riverboat gambler.


I think his interest rate would be fixed . All of mine always have been .

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## Zippyjuan

The tax deduction is getting back a portion of what you are paying in interest.  If you are in a 25% tax bracket, you save 25 cents on every dollar you pay in interest.  If y you pay off the loan you are no longer paying interest and are getting basically 100% of what you were paying in interest or one dollar for every dollar of interest. The tax deduction angle is not the compelling question of what to do.  The real question is what else you can do with the money instead. Can you get an after tax return of higher than your mortgage rate?  If your rate is three percent and you can be fairly certain of getting an after tax return on an investment of say five percent, it is worth it to make the investment and continue to make your regular mortgage payments.  

My mortgage rate was 6.5% and during the economic crisis was not convinced I could do better so I prepaid large portions of my mortgage- finishing it off in just under 15 years (a 30 year mortgage which had been refinanced twice).  I lost my deduction for the interest but now have zero interest to pay.  Getting rid of the mortgage also freed up the money which was going to it and that effectively increased my disposable (after tax) income by about 25%.  A nice hike.

I did not have any PMI so you would also be saving that every month if the mortgage was paid off.

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## Dforkus

3% is a very reasonable rate. Considering you are only paying 3%, I'd be inclined to not overpay the mortgage aggressively. 

Some of this has to do with risk tolerance of the party involved. A wise choice that keeps you from sleeping at night isn't really that wise.

There is always market risk compared to a fixed return you get paying debts early.

But even a boring company like coca cola pays a 3% dividend, so you are practically even-steven without even pricing in cokes 100 year history of year over year price accumulation. 

This question is real to me as I'm neurotic about debt, and have to constantly fight the urge to pull money out of the mortgage and throw it into my 4% mortgage.
I own a couple natural gas MLPs   ETP and NGLS that pay out more than that in dividends (and the price has also appreciated nicely). I'd be stupid to yank that money out, but I do get the urge to occasionally.

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## thoughtomator

I'm kind of pissed off that the financial system is so complex I can't give a straight answer to it even with my 800 math SAT score.

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## angelatc

Starve the beast. Pay it off and invest it in the market, or bonds, or something.  Paying 3% interest versus gaining 3% interest is an increase of 6%.

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## Schifference

Paying off the loan eliminates the monthly payment thus reducing the need for that income. Less income means less tax. However the rule of 72 would indicate that a return like that of Berkshire Hathaway of nearly 20% would allow my investment to double every 3.5 years. 350k = 700k in 3.5 years and then 1.4mil in 7 years. What do you think about BRK? 48 years of nearly 20% return?

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## Zippyjuan

20% return consistantly is extremely difficult to find. 
This article suggests that Berkshire has been averaging just over four percent over the last ten years (which includes the economic crisis):
http://www.rationalwalk.com/?p=12473




> Berkshire’s stock price has fluctuated significantly over the years, particularly since the financial crisis of 2008-2009.  *For the ten year period from December 31, 2001 to December 30, 2011*, Berkshire appreciated from $75,600 to $114,755 for a total return of 51.8 percent, or* 4.26 percent annualized*.  Over the same period, a popular exchange traded fund tracking the S&P 500 (SPY) rose from $114.30 to $125.50 while paying $21.88 in dividends representing a total return of 28.9 percent, or 2.57 percent annualized.

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## jclay2

> Lets suppose that you pay 22% in Fed tax, 5% State tax, & 7.35% payroll tax and have a mortgage of $348,792. You did not put 20% down so you pay mortgage protection insurance. The principle, interest, & mortgage insurance is $1883.43 per month. Property tax & homeowners insurance are not included. In order to pay $1883.43 you would need to earn $34,450 income. If you invested your $348,792 at 11% you would gross $38367.12 per year. Fed & State taxes on the investment would be $10,359. Your 350k investment would also be diminished by the rate of inflation. 
> 
> It seems that paying off the 3% mortgage would equate to not having to earn $34,450 per year. The investment that you want to use to pay your mortgage would net $28008. 
> 
> Is it wiser to pay off the mortgage or invest the cash?


Debt is an absolute certainty, investment performance is not. Wit that being said, I think it is very important to develop methodical discipline with investing. I would suggest doing both, but using the larger shovel on the mortgage.

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## Schifference

> Debt is an absolute certainty, investment performance is not. Wit that being said, I think it is very important to develop methodical discipline with investing. I would suggest doing both, but using the larger shovel on the mortgage.


Yes both would be good. The problem is that paying some of the mortgage does nothing to reduce the payment. Paying down around 55k would get rid of PMI and save 356 month and would take about 6-7 years off the backend of the mortgage. Spending money to refinance seems like wasted money. I am not sure exactly how much I will be getting but I know I will receive an inherited IRA worth around 60k that I intend on keeping as an IRA. Besides that I am confident that I will get at least another 100k but maybe much much more. The executor, my oldest brother, wont reveal or allow the investor to reveal the value of the estate at this time. As mentioned my portion excluding the IRA will be more than 100k but maybe as much as 600k I don't know. I have a rental that I owe around 140k at 4.5% so I could pay that off and the PMI. Obviously if an investment could double a couple of times in 7 years I would keep the loans and just keep plugging away. That kind of return is speculation and not certainty. I am very multi talented and would like to once again work for myself doing whatever I can to make ends meet. Wife has very good income. I work as an LPN at a nursing home for around 22 an hour. I need to have a license and could get sued for anything I do wrong. Everything a nurse does is under scrutiny. I care for 32 patients each shift and many of these people are pretty demented. Since my wifes income puts us in a higher tax bracket I feel I work for like $10 hr. I work different days every week Mon this week not next the only day I work every week is Friday. Every other week I work Tue, Wed, Fri, Sat, Sun, Mon. I did this last week and am scheduled to do it again next week Memorial weekend. Just so happens this weekend I am on call and have to go in for 4 hours today and who knows about tomorrow. Furthermore I work 3-11 so I miss out on many home activities and my high school kids sporting events and such.

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## Zippyjuan

Paying early reduces the amount of money going to interest (and increases the amount going to principal) for all future payments. 

Refinance?  At three percent? Definately would not do that now.  A couple of reasons. One is can you get a lower rate than that?  What is the difference between the new payment and the old one and how long will it take for that difference to cover the costs of the refi?  This is your break-even time on the refinancing. If, for example, you saved $100 a month on payments and it cost you $10,000 to refi, your break even on those costs is 100 months or over eight years (random example). Only after that time do you really start to save any money.  And take part two here into consideration as well:

Second- How much time left on the loan? The more years you pay on a mortgage, the higher the percent of the payment going to principal.  A refi would again shift more of the payment back to being just on interest- adding to the long-term cost of the loan.

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## LibForestPaul

One angle that has not been brought up - safety. Say you are aggressive, and make additional payments. You get laid off or fired. Now what? Do you have 6months expenses backup? or more for medical? Moving expenses if you need to relocate? 
If I were in your position. I would not pay off aggressively until I had at least 6 months of expenses in the bank. Furthermore, the prepay would only be to eliminate the PMI; is that 3%?

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## RickyJ

The fact you even ask this question is reason enough to ban you as far as I am concerned. A 3% mortgage is very low interest and I would keep paying the minimum until it is paid off. If you can't find a way to make more than 3% interest on your investments then go ahead and pay your mortgage off, you are going to need that house. Do you have any more inane questions? Feel free to post them to http://www.idiot.com/.

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## Schifference

> The fact you even ask this question is reason enough to ban you as far as I am concerned. A 3% mortgage is very low interest and I would keep paying the minimum until it is paid off. If you can't find a way to make more than 3% interest on your investments then go ahead and pay your mortgage off, you are going to need that house. Do you have any more inane questions? Feel free to post them to http://www.idiot.com/.


Where would you invest 300K?

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## cubical

Buying stocks at all time highs vs a guaranteed 3% return(really 2.25% if you are in the 25% tax bracket). Not a great set of options out of the two traditional investment choices. If it were me, I would be buying a lot of gold, some utility stocks and probably some selective value stocks. I wouldn't pay down the debt at only 3%.

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## Schifference

The letter came today. I think from my best guestimate that around 60k will be in an IRA & 275k will come tax free. I am seeking investment strategies. Any and all advice is welcome. Thanks!

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## Carson

> snip
> 
> Is it wiser to pay off the mortgage or invest the cash?


I couldn't really follow you until you ask the question.

I think paying off your debt would be the best way to go.

But then I'm pretty jaded at any sort of "Investments" at the moment as inflation and capital gains taxes skew any chance of getting ahead.

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## oyarde

> Buying stocks at all time highs vs a guaranteed 3% return(really 2.25% if you are in the 25% tax bracket). Not a great set of options out of the two traditional investment choices. If it were me, I would be buying a lot of gold, some utility stocks and probably some selective value stocks. I wouldn't pay down the debt at only 3%.


Makes sense to me , some dividend paying utilities , a few stocks , some gold , maybe pay an extra $100 a month on the principal, some land ......

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## Schifference

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## osan

> Lets suppose that you pay 22% in Fed tax, 5% State tax, & 7.35% payroll tax and have a mortgage of $348,792. You did not put 20% down so you pay mortgage protection insurance. The principle, interest, & mortgage insurance is $1883.43 per month. Property tax & homeowners insurance are not included.


Property taxes are always included in the mortgage payment.  Lenders insist on this for what I should think are very obvious reasons.





> If you invested your $348,792 at 11%


And where are you going to find this magic 11%.  Have you not been paying attention to the markets?




> Is it wiser to pay off the mortgage or invest the cash?


All else equal it is ALWAYS smarter to pay off the mortgage debt on your dwelling.  The first thing anyone should endeavor to do is become debt-free.

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## Zippyjuan

> Property taxes are always included in the mortgage payment. Lenders insist on this for what I should think are very obvious reasons.


You CAN have your property taxes included in your mortgage payment (it goes into an escrow account which makes the payment when it is due so you basically make them  an interest free loan) but you don't have to.  I didn't have mine set up that way.  Some people like that option as a "savings account" so they don't have to come up with the money to make the bi-annual payments all at once.

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## oyarde

> You CAN have your property taxes included in your mortgage payment (it goes into an escrow account which makes the payment when it is due so you basically make them  an interest free loan) but you don't have to.  I didn't have mine set up that way.  Some people like that option as a "savings account" so they don't have to come up with the money to make the bi-annual payments all at once.


I have used it on two properties , but none of the others.

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## jbauer

> You CAN have your property taxes included in your mortgage payment (it goes into an escrow account which makes the payment when it is due so you basically make them  an interest free loan) but you don't have to.  I didn't have mine set up that way.  Some people like that option as a "savings account" so they don't have to come up with the money to make the bi-annual payments all at once.


Yup, I've never escrowed property taxes and insurance.  No reason to give them an interest free loan.

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## misterx

> The fact you even ask this question is reason enough to ban you as far as I am concerned. A 3% mortgage is very low interest and I would keep paying the minimum until it is paid off. If you can't find a way to make more than 3% interest on your investments then go ahead and pay your mortgage off, you are going to need that house. Do you have any more inane questions? Feel free to post them to http://www.idiot.com/.


I would agree if he wasn't paying mortgage insurance. That makes it less clear cut. Once he gets his principal down and stops paying that it is a no brainer. Where else are you going to get such cheap money?

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## osan

> You CAN have your property taxes included in your mortgage payment (it goes into an escrow account which makes the payment when it is due so you basically make them  an interest free loan) but you don't have to.  I didn't have mine set up that way.  Some people like that option as a "savings account" so they don't have to come up with the money to make the bi-annual payments all at once.


I guess it goes on a state-by-state basis.  It was so in NJ - I was given no option in the matter.

Learn something new every day, I suppose... though I find it interesting that a lender would not insist on it because if you fail to pay the tax and the property is seized, the lender could be SOL.  I suppose those risks may also be state dependent, but I know in several states such improperly seized properties go up for little more than the taxes owed and I cannot imagine that in all cases such properties are mortgage-free.

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## ord33

> The letter came today. I think from my best guestimate that around 60k will be in an IRA & 275k will come tax free. I am seeking investment strategies. Any and all advice is welcome. Thanks!


Here is what I would do. Without a doubt, I would first pay the mortgage down to an 80% LTV or whatever the stipulations are in your loan to remove the PMI. The PMI you pay is not deductible, while the mortgage interest is deductible. Other than for "peace of mind" reasons, it doesn't make sense to me to pay down your residence at a 3% interest instead of your $140k investment property loan at 4.5%. Take the extra profit from the increased NOI from the investment property and put it as extra toward your residence if that gives you a better peace of mind. That is what I would do in regards to the housing portion. You said you had $55k to get rid of the PMI and $140k to payoff the investment property. The remaining $80k of the $275k you can invest how you best see fit that will produce a reasonable return without too much risk. If you are young and you and your wife don't already max out an IRA, then that would probably be part of my strategy. You don't mention your age, so I don't know how risk averse you should be at this stage of your life?

If you (and your wife) are near a retirement age, then I might totally restructure everything I just said since I sure wouldn't want that high of a mortgage payment on my residence near retirement age when that $22/hour goes away and my wife's income goes away.

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## fr33

I would pay off the mortgage. But all this advice is subjective depending on our situations, goals, and state laws. I saved up until I could pay cash for my house and I don't want a mortgage on it. So then under this circmstance and my state laws they cannot take away my property under the homestead act if I fall on hard times and go bankrupt.

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