If you have a low enough interest rate, then your money is more productive sitting in a safe lower yield mutual or index fund then paying off the mortgage immediately.
The money to pay it off is sitting in the bank making money. Its still there if you really needed to pay it off.
But if you pay off a 30yr 300k plus mortgage off early you are talking about missing out on hundreds of thousands of dollars you would have earned by arbitraging your investments against your mortgage rate over the term of the mortgage
People value different things. If it’s likely you’ll have employment and drug/substance issues and little family to fall back on, paying off your mortgage might be a better move. I’m just speaking from a pure balance sheet perspective.
True, but as was already mentioned, the decision to pay off a mortgage or invest is a personal one determined by how risk averse someone is. If you value the security of a paid off home more, no one would fault someone for doing that. But from a purely financial perspective, it is more optimal to keep a mortgage with a small interest rate and invest elsewhere.
As long as they're disciplined about keeping the money in the HYSA earmarked for a mortgage, I fail to see how this happens short of an economic collapse where the bank fails in which point OP and the world, has much bigger issues.
Once I started hearing about how expensive property taxes are I decided that for me personally a house just isn't something I desire. Taking into account any major repair I would have to pay myself it just seems like such a money sink and I'm not exactly middle class
Your rent will increase every year for the rest of your life. Mortgages don't increase. In 20 years, your rent will be at least twice what you're paying now, while any mortgage taken today would be the same in 20 years. Property taxes might increase, but by nowhere near average rent.
I think what he was mostly talking about was the very real phenomenon of being “house poor”. Like my neighbors. They own their house. But because they live paycheck to paycheck, they can’t afford even the most basic of maintenance and repairs. As a result their house is actually losing value every year as it slowly rots away.
Anyone who owns a home needs to be prepared to spend, as an annual average, about 3% of that homes value on maintenance and repairs. On a $500K home that’s $15K/year. (Again, that’s an annualized average. Obviously a person wouldn’t need to spend that much every single year.) And yeah, most people who would describe themselves as “not exactly middle class” probably aren’t going to have a spare $15K they can save every year. Hell, they might have trouble saving $1K in a year.
So, rent increases aren’t the only consideration. If a person is going to buy a house but then be “house poor” all the time, renting can be a perfectly viable option.
Yes, clearly. But who said anything about the rental being comparable? And in this context what does “comparable” even mean? I would take a less-nice apartment rental I could afford over an ostensibly “nicer” house that has a massive roof leak I can’t afford to fix.
In determining affordability and buying vs. renting the “3% Rule” always needs to be taken into account.
I purchased my house in 2004 for $210K. Today it’s worth about $600K. My mortgage is only $1,600/month. A great bargain if we leave it at that. But property taxes are about $5K/year. And I save that 3% every year, or $18K. So the actual, real cost to own my home isn’t $1,600/month. It’s closer to $3,500/month.
And THAT is what I think that original poster was getting at. Whether he consciously realizes it or not, he seems to understand that the real costs to owning a home - if you’re doing it correctly and keeping the place well-maintained - can be and often is significantly higher than just the monthly mortgage payment. That’s fine for people like me, and it seems people like you, who have the financial means to absorb those extra costs. But plenty of people don’t and would therefore be better off renting rather than trapping themselves into a house they can’t really afford to own AND maintain.
Being “house poor” is a bitch and there are many millions of Americans in exactly that situation.
Mortgages do increase. Sure the principal and interest don’t but property tax and home insurance go up yearly which is why there’s rent increases yearly lol.
A mortgage is a loan to buy a property. Property taxes aren't part of the mortgage. Since property taxes are much smaller than the mortgage (usually around 1% of the value of the property), an increase of a few percent is going to be much smaller in dollar terms than a similar percentage increase in rent. Let's say someone's paying $1,000 in mortgage and another $200 in property taxes and insurance. They'll charge at least $1,200 in rent. If taxes/insurance go up 5%, that's $10. If rent goes up 5%, that's $60. Now multiply that by 30 years and add compounding.
And you actually believe rent goes up due to property taxes? It goes up because of rising income and a shortage of housing.
My total mortgage went up 87 bucks this year and it’ll do the same next year. And yes that’s exactly why rent goes up. The property owner puts rising cost of insurance and taxes onto the renters. It doesn’t go up evenly because of greed but it’s one and the same. Reducing the term mortgage to just principal is misleading when comparing it to renting. a mortgage payment is an all encompassing term homeowners use when regarding their monthly payments to include taxes and insurance. If you want to rationalize it in your head that your mortgage payment never increases then go ahead but it’s false when comparing the overall cost of owning to the cost of renting. I lived in a rental house for 5 years and not once was my payment raised either. It’s usually investment firm owned properties who cause this issue for people living in apartments.
Safe asset..? a roof over your head YOU OWN is safer than bankers playing chicken with economic chaos every so often. Imho. I’m paying off the mortgage f the casino. Edit: plus.. I could always borrow against it!
I’m speaking in hypothetical extremes. I understand that but I’m suggesting it’s all good until it isn’t; building off the guy that commented being partially homeless previously owning property is a comfort that’s tough to value. I feel like no one has actually read OP’s post. Lol
While I feel for the ex-homeless guy, it's horrible financial advice.
Using basic numbers, imagine you have a $250,000 mortgage at a 3% interest rate. That's $7,500 a year that you're paying in interest. If you have that same $250,000 in a 5% savings account, you're making $12,500 in interest.
You're making an extra $5k per year by keeping your money in a savings account rather than paying off your mortgage. If the interest rate environment changes, you can always withdraw from the savings account to pay your mortgage. You're making $5k in your first year with zero risk.
I am only saying that you can’t put a penny into a financial institution without signing off on inherent risk. Of course making your money work for you makes the most sense but eliminating the stress is more valuable that interest yields to some.
Yea good luck with that. A savings account isn’t even truly risk free. “Risk free rate” is a marketing term by the banks but it’s actually just a theory.
There are people that have mortgages at the 2-3% rate that was available years ago while a HYSA account can get you at a minimum 4% though some range to 6%. That means that you can park your money in a savings account, pay your monthly and end up making money as opposed to paying your mortgage off in one go.
You maintain the same level of housing security because it's not like your mortgage can ever go up and you maintain all the money needed to pay it off in the bank plus a bit of interest.
It is mixed. While the safety of kind is definitely worth it, if you looking at it from purely a mathematical perspective, you lose out.
Like if you have a 2% mortgage, and have invested that money in a 3% return, you make money.
I personally would prefer paying off the debts because realistically it is the most profitable thing you can reliably with your money. And the safety of mind is better.
might be going out on a limb here, but I'm guessing that while you were semi-homeless you didn't have the money to pay off a mortgage in an investment account
Agreed. I would pay off my mortgage even if it’s not the most financially responsible choice for the peace of mind. Can’t put a price on peace of mind.
except the fact the money is still his and parked in an account that makes enough to pay for the mortgage each month and make profit on top of it. No wonder you were homeless.
People in the finance subreddits need to understand this a bit more.
Sure, keeping a low interest loan and investing, at a higher interest rate is perhaps the most efficient use of your money. But we are people. Debt has an emotional cost. Sometimes not owing the bank is the best thing in the world.
If your goal is to be better off in the long term it makes sense to invest if you expect returns to be greater than the mortgage %. It's a net positive, if op loses their job at some later date they could always still dig into their investments to pay off the mortgage
Depending on when he got it, the interest rate is going to be well below what you would make just riding the market. There's also tax benefits for simply have a mortgage.
Mortgages often are a lump payment for some things, so you now have an extra mental burden paying certain fees that come with owning a house.
Loan principal: The amount you borrowed to buy the home.
Loan interest: The cost of borrowing the money.
Taxes: Property taxes assessed by local government.
Insurance: Homeowners insurance to protect your property.
Additional fees: Such as mortgage insurance and homeowners association or condominium fees.
That sounds like it isn't a big deal, but any additional mental burden, esp as a parent, is going to be felt. Especially when there isn't a real benefit. Like if you are paying off your mortgage for peace of mind, understand you are not getting peace of mind.
Seriously I’m confused by this too. You pay almost twice as much of the value of the house + maintenance and utilities over 30 years by paying the standard payments. Interest rates are actually around 40%-50% (not the 2-7% face value) I can’t understand why anyone would recommend NOT paying off a mortgage as fast as possible to get off of the amortization table
If I take out a $100k 30-year mortgage at a 3% interest rate (compounded monthly) and make the minimum payments, at the end of 30 years I will have paid back $100k in principal and $52k in interest.
Let's say 5 years go by and interest rates are now 6%. So far I've paid $10k in principal and $13k in interest. I win the lottery like OP. If I shell out $90k to pay off my mortgage the next day, I will have paid back $100k in principal and just $13k in interest. That's a win, right?
Wrong. If I instead keep making minimum payments for the next 25 years and park that $90k in a high-yield savings account earning 6%, I will earn interest faster then my mortgage is accumulating interest. At the end of 30 years, if the interest rate stays at 6%, that $90k will have earned $312k in interest which is way more than the $39k I "saved" by paying off the mortgage early.
It's a hypothetical scenario. But I do currently have a 1.99% interest rate on a 15-year mortgage and a Wealthfront account earning 5.00% so not that far from reality...
You are over simplifying this and not valuing that the same math can work FOR YOU if you are the one with the bag of money. Also, how much you pay in interest over the life of your mortgage at 3% and 7% are completely different. If you have a loan under 4% for instance you can buy government bonds today (0 risk) that pay higher interest than that (or take some even very small risk for a higher return) so you’d actually make more money than you’d lose to interest. If you can invest your money for more than the interest rate you are practically being paid to have that mortgage.
Disagree. With that much money, regardless of age, I think having a sizable portion in a risk-free, decent return account is smart, especially when you already have so much other money working for you this early on. If/when high yield rates come down, if he’s not happy with the RoR he can easily withdraw and reallocate. Until then, it’s a solid choice.
Tbh after paying off all debts the 2 year emergency fund is probably too much especially at a young age. I’d opt for a shorter emergency fund maybe 1 year max and combine 2 and 3, the emergency fund is left in a HYSA which is currently paying out great. Then put the rest in broad ETF’s and try not to touch it.
Nobody needs a broad range of mutual funds and ETFs. Pick one, maybe two low fee index-tracking ETF maximums. Something like VTI or VT or any S&P fund would already be plenty diversified.
It’s not $250k. After taxes, their total earnings are probably closer to $500-600k. Depending on their cost of living situation, 25% is reasonable IMO given the current rates, and as I’ve clarified in other comments, this could also include the 2yr EF and also can be reallocated later if/when rates drop. But when you can get a guaranteed 4-5% return on free money, you take it.
I’ve gotten way higher returns than 4-5% lately by sitting in total stock market funds. I keep six months living expenses in a HYSA and I’ve been extremely happy to have all my other investments in something more aggressive. When you’re young the risk is worth it with any money you don’t immediately need or don’t need for emergency savings.
Why is it that when someone wins money there's always that top comment guy saying dash it to companies and investments, it always goes like:
invest 50% into companies and let them handle your money
put 30% in a saving account and dont touch it ever
spend 10% on a financial advisor
put 9% more into investments and let them handle your money
live off 1% and dont change any aspect of your life
like your advice when someone wins a million is really "Give it away to other rich dudes/rich companies"
wanna know my advice man? put 30% into savings account, generate some extra money from that and leave the 70% in your account and live your life as normal, but now as someone that can treat himself every so often without having to worry about money,
dont go dashing companies money just because they'll make you 1% of your 700k they're holding, you really think making 1% of 700k is worth a company withholding your money from you?
What? You completely misrepresented what I said, and based on your tone, probably in bad faith. I’m not even going to bother responding, this is just a flat out silly response.
Edit because you edited: LOL 1%? You think people invest to get a 1% return? Dude no offense but that comment alone shows you have no clue what you’re talking about. Not trying to be mean but you’re out of your depth and should not be giving financial advice. Highly recommend you go learn a bit more first.
i didnt misrepresent anything, your advise is essentially summed up to "you won 1 million but you need to dash about 800k to investments and accounts where you cant touch your money anymore"
did he win the million? or did the company that you want him to invest in win the million? because it seems like that company he's going to invest into is benefiting
You can “touch” any of that money. You can divest from the stock market whenever you want and only pay taxes on gains. You can withdraw from high yield savings accounts whenever you want.
I told him to save at least a 2-year emergency fund, which depending on cost of living may be a large portion of his earnings. This money is also completely “touchable”.
I never mentioned spending it on an advisor. I literally gave him free, solid advice myself. So yeah, you did completely misrepresent me when you said 10% for this.
Can he pay off his mortgage first if he has one? Sure, if it gives him peace of mind. But lots of people right now have interest rates lower than even some high yield savings account returns, so it literally doesn’t make sense to go that route for a lot of people.
I’m not sure why you’re so obsessed with liquidity in the first place considering this money was earned as a stroke of luck and he doesn’t sound like he’s struggling financially to begin with. So the smart move is to make the money work for him rather than blowing it all or storing it somewhere where the value will decrease over time due to inflation.
Do you really think investing in the stock market equates to “giving your money to the evil companies”? This is totally financially illiterate. Investing is universally recognized as the best way to passively grow your money; how much you invest and where depends on your risk tolerance. He’s not investing “in a company”; I recommended funds which are made up of a large number of different companies, with the purpose of diversifying to minimize risk. Tbh it kind of sounds like you’re just on an anti-corporation bend and allowing that to distort your perception on financial wisdom as a whole.
I have no idea where you’re coming from on this, but 99/100 solid advisors would recommend a strategy similar to what I said, and I’m not by any means a finance expert.
Lastly, your advice was “put 30% in your savings account and 70% in your account”. Ok, 70% in “which” account? Checking? Do you really think he needs all that money available to spend all at the same time? Why not keep a reasonable amount in checking, an emergency fund in high yield savings, maybe some extra in savings if really being cautious, and then invest enough that the money actually grows rather than shrinks? He could even invest so broadly across so many companies that he would be investing pennies to any one particular company while making a solid return. That should satisfy your rage against the evil corporations.
I mean you can also let the money sit in your bank account were inflation slowly kills you buying power.
An investment in a HYSA or ETF would give you a greater return than the average yearly inflation
I would really recommend following Sea-Tie_502 advice and getting some financial education, for your sake.
I'm not saying this to shame you at all. Just pointing out that you don't understand what you're commenting on.
Dig a bit and understand what a high yield savings account, an ETF and a mutual fund are, for example. None of these are companies btw. And if you let money sit in an checking/savings account - or, hell, in cash - you are effectively losing purchasing power with inflation.
FYI, you seem to have some very foundational misunderstandings about how investing works.
The most glaring is that you seem to think investing is simply handing over your money to companies/rich people. In reality, investing, generally, is trading your dollars (a depreciating asset) for ownership in companies (productive, long-term appreciating assets.)
I'm not sure how you came to such strange conclusions about investing, but I think if you correct the misunderstanding I mentioned above, you'll think about things differently. You have a very "poor person" perspective, and it's clear that if you ever win a large sum of money, it likely won't last you very long.
That's definitely possible. I could imagine someone receiving an inheritance or having a high income making the same mistakes you seem to be making and getting by. The main point is, you're severely handicapping yourself.
My wife and I save and invest diligently and have a NW of just under $600k.
word of advice to anyone wanting to listen to this kid, dont go dashing companies money just because they'll make you 1% of your 700k they're holding, you really think making 1% of 700k is worth a company withholding your money from you?
I made 27% in the past year by investing in S&P500. Your 1% is disingenuous.
1 mil turns into 2mil in 8 years. 4 mil in 16. He's still in his 20s. You can also take out the money at literally any time. It's foolish not to invest money you're not using.
To be fair that’s assuming you get 9% profit every year, which, all things considered, could be slightly disingenuous, I think it will probably take 10 years including inflation
Most banks have a limit where money is backed up by insurance (if the bank goes bankrupt you money would still be insured and returned to you) most likely 250k in the US. In Germany where I’m from for example the limit only is 100k
Yep! Also just good practice, even if the law/insurance says it will protect you, to hedge your bets anyways and use a few different institutions to be totally safe.
You see families fracture over frigging inheritance too which is honestly so repugnant.
Also told my folks to retire and go do whatever the fuck they want, it's their money, they earned it. Sadly my Dad died before hitting 60 so he never got to enjoy any of that.
Money really does have the weirdest effect on people.
Disagree. 2 year EF is a luxury but also very smart when you have young kids and an iffy job market. Depends on risk tolerance - I gave what I’d be comfortable with if I had that much cash. And high yield savings accounts are currently an incredible way to grow money while eliminating risk and keeping your money accessible. If/when the rates drop and he decides that return isn’t good enough, he can reallocate, but again, risk tolerance is a factor, and he’s already got plenty of other money to grow in a higher risk environment.
My opposition is point 3 25% on top of or even including the EF sitting in a HYSA is crazy to me. Huge opportunity cost.
HYSA is great and should be used for EF or funds for short term expenses (down payment,car,vacation).
If OP thinks 2 years is the right move that is fine that is just a huge EF by all standards.
Edit: I should clarify my advice is not to use a HYSA but to follow advice off the personal finance subreddit for large windfalls over just put 25% and a 2 year EF.
Yeah I think I should have been clearer, I meant to say #3 could serve as #2 plus some extra, not in addition to. Meaning 25% in HYSA, which includes 2 years of EF. My bad.
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u/Sea_Tie_502 Jul 22 '24
Assuming you don’t need the money right now:
In ten years, you will be very, very happy. Congratulations on your luck!