Pay off the house or invest?

I just paid off my house 2 months ago. Cant emphasize the relief it brings. As Dave Ramsey says, go ahead and pay it off and if you hate it, you can also go get another mortgage :)

Here is a point of view:

• Paying off mortgage + working on your own thing = You believe you should manage your own assets ( the asset is you, your project and your house)

• Working somewhere + money in index fund = You believe some other people should manage your assets (Your boss manages you as an asset, a fund manager manages your money)

What options do you foresee having a better return on investment to create value for you (=money, happiness, etc...)?

I would follow your instincts.

Some years ago, I was made redundant and could not afford to keep up the mortgage payments. I lost the house.

Right now, you are not a house owner. Your finance provider owns your house.

If you are lucky enough to be able to pay your house off, do so. You then have security. You have a roof over your head. Your necessary annual outgoings are now reduced to local property taxes, utility bills, food, clothing and running your car.

If that then frees you to build your own business and a permanent source of income sufficient to give you a good lifestyle and - effectively - your pension, that that is the investment you should make.

Not all investments can be measured directly in terms of money.

Let's do it the other way now.

You still have a mortgage and need to pay that off each month for the next x years. Your investments with pension funds, hedge funds or whatever may take years to pay off - and, meanwhile, you are leaking working capital to change your stars.

In the current investment climate, almost any investment you can make as a single individual without access to huge funds is going to take a minimum of a decade to show a decent return, assuming your investment managers, over whom you have no control, do a good job.

Option A puts you in control. Option B leaves you subservient to the performance of others - and no-one is more invested in your life than you are (and possibly your other half!).

I was in your situation a few years back...and I felt like a total idiot thinking about the times I wasted which could've been saved if I had not delayed paying off the mortgage. Trust me it will free up your mind to focus on more important things.

Quite stunned that only one other poster even mentions your spouse, who may not want you to live off their income while you noodle on whatever you feel like.

I don’t know you, but if I found my spouse talking about this with the internet and not with me, they would soon find themselves mortgage free. Doghouses don’t cost much.

Here's a great article with lots of pros and cons: https://www.fool.com/mortgages/2018/05/24/pay-your-mortgage-early-or-invest.aspx

The most important point for me is that your return on investment is lower when you pay off your mortgage:

While you earn a guaranteed return on investment by prepaying your mortgage, your return on investment is low because mortgage interest rates are low. If your mortgage rate is 4.5%, your rate of return from prepaying your mortgage is just 4.5%. By contrast, the S&P 500 has produced annualized total returns (including dividends) close to 10%, which is significantly higher.

It doesn't really make sense to pay off your house instead of investing the money in index funds.

would invest the money in the stock market (index funds), and use the returns to pay for your mortgage.

You also don't have to have a job just so you can continue paying your mortgage. You can use the investment income to pay it. Just sell some shares every so often to make the regular mortgage payments.

I would pay off the house.

Personal runway is one of the most important metrics to track for entrepreneurs.

Balaji Srinivasan (CTO of Coinbase) made this point on the podcast "Venture Stories: Balaji Srinivasan and Erik Torenberg on Crypto in a Borderless World".

At 13:00 into the podcast he says:

The most important metric for an individual is your personal runway. Savings / monthly expenses = personal runway. If you have a long personal runway you don’t need angel financing. You can bootstrap and own 100% of the equity.

In this scenario paying off your house lowers your monthly expenses (smaller denominator in that equation) and would give you more options.

Pay off your mortgage. That will be a safe bet come rain, hail or shine, and the stock market is currently at a high that can't last.

I was in your shoes a few years ago. I had been investing and 401k'ing and then went the route of paying off my mortgage at 31.

There are some answers you can quantify like the cost of your mortgage vs return rates over the life of your loan. What I couldn't quantify was the value of knowing no matter what risk I take on myself or in business, I will always have home taken care of.

I learned I could carry only so much risk in different areas of my life at a time. For example, if i had emotional instability I wasn't sticking my neck out at work.

So I lowered my personal risk by having the basics (home, car, insurance, relationships) very stable which means I'm able to take greater risks in my work and community.

My personal operating costs are much lower and so is the bar to 'success'. It's very different for my friends who need 25k a month to break even and only have a few months working capital.

We are fortunate to have a safety net of in demand skills but you're not alone in the decision. You should talk to your spouse and make sure you are 100% on the same page about both your feelings, dreams, fears and needs about what it would be.

You and your SO determine how much risk is acceptable based on where you are right now and what you want for your future selves.

It could be that the answer is invest it all and work side hustle hours on your business. It could be that you don't want to have so much money tied up in a physical asset and you want to move somewhere else in a few years. It could be that you want to retire early and want an investment based path to get there.

Here's a principled way to decide, from one of my favorite bloggers: https://putanumonit.com/2018/07/03/debt-anti-investment/

Roughly it makes sense to think of the mortgage debt as a risk-free investment at the interest rate of your mortgage. And the blog post talks about how to assess the value you should place on the risk-free-ness.

Don't know what your interest rate is, but it it makes much more sense to put the money in an investment grade muni. Those can return 5% on average and are very liquid. It would pay your mortgage for you and still leave residual earnings (assuming your mortgage rate is less than 5%). If it's in your state, there are also favorable tax implications.

Basically, you get the best of both worlds. Your mortgage is paid off for you and you get to invest while not being as risky as equity markets.

Does the decision need to be binary? Why not pay off half the mortgage and invest the other half?

Diversification of your assets in different asset classes based on their risk level, is what I learned to be the best way to handle those situations in business school.

If you decide to invest the money then I don’t recommend to invest in index funds. The dividend payment will most likely not be enough to cover the mortgage payments. That means you will need to sell some stocks from time to time to cover the rest. Thats not something you want to do during a downturn.

Instead you need to invest in assets producing regular cashflow. For example commercial reale state like multifamily is very good at that. Even with the compressed cap rates right now those still provide 7-8% cash flow a year and additional money once the property is sold (usually after 5-7 years). There are some public REITs but most of the multi family investments are all private. Thats means you need to find a group to invest with (or buy your own building, but thats a lot of work).

In the end there is no general “great” solution. It all depends on your personal situation. How much worth is the house, current other savings, partner income, with what do you feel comfortable etc.

I'm with @thomasm1964 although I'll tell you exactly what I would do. I'd pay off the house. That'll free you to do anything you want for most the rest of your life. Then get a business making $4k/mo+ I'd let my wife know she can happily quit her job (if she wanted to).

Put all the control in your hands.

Would you normally borrow $200k to invest that money in something else?

That's basically what you would be doing if you invested the money you currently owe.

I just have another data-point that I would like to mention: https://qz.com/1402998/beyonce-and-jay-z-have-a-52-8-million-mortgage-as-do-more-billionaires/

Even the wealthiest people are taking out huge mortgages on their multi-million dollar homes, because they realize that they can get better returns by investing the money elsewhere.

Paying off debt is the #1 way to improve your financial position. In most cases, I would say paying off the house first and bootstrapping businesses / growing slower is the way to go.

I wouldn't say that's 100% the right decision though and it sucks that the answer here is like most other situational decisions; it depends!

When I think about this decision though, I imagine how much less stress you'll feel building a business knowing you don't have any assets in harm's way. So I definitely agree with @nickchuckwalter here. That in itself would make the decision for me.

Just my two cents :)

I think this is as much a personal decision as a logical one. I hate being in debt, so I'd pay off the mortgage first. It will be a huge relief

Pay off the house. You're in debt. You likely only really want to invest because you have found yourself in a situation wherein you need money to pay of your debt. So, your awareness is gravitating towards capital expansion and not debt reduction; the two are not the same thing. Some self-awareness is needed.

In simple terms: You don't have the luxury to take on high-risk (or even low risk) investments. Paying off the house is an investment in itself.

Pay off the house. Don't squander the opportunity to free yourself.

If you really have an appetite for risk, but want to play it safe. Consider this: Pay off the house. Then sell the house, move somewhere cheaper, and enjoy the margin.

It's impossible to answer this without knowing the rate you're paying on your house. Your level of risk-tolerance is also an important factor.

I was in this position years ago.

I decided to pay off the mortgage as my objective was to be debt free, move to Thailand, and use rental income to part fund my lifestyle there (I was a remote tech writer too). It worked well. However, looking at it from a purely financial perspective it was probably better to have put more of that money into my pension fund, claimed the 40% tax relief, and got the market growth. Hindsight is a wonderful thing!

So, if I was in your position? What would I do? I would probably still choose to pay off the mortgage. Why?

1. The market is very strong right now. The decade since GFC in 2008 has seen tremendous market growth from that low point. Can such strong growth be maintained? - history says no.

2. There is something magical about being completely debt free. The freedom his breathtaking. It is a wonderful feeling to not be beholden to anyone.

3. Once the mortgage is paid off, or is at a very small balance, some mortgage schemes let you do things like draw back overpayments, take a mortgage payment break, or remortgage (to say fund a lifestyle change). Overpayments are mostly a good thing. I used mortgage overpayments to pivot into contract work. I knew if I fell short of a contract (which I didn't) I could draw back on mortgage overpayments. For this reason it might be worth keeping a small balance on your mortgage, or looking into a more flexible mortgage. Something to look into with a good mortgage advisor.

A few random points:

A) It is nice to have cash on hand. This is generally frowned upon, but I find I sleep better have a good chunk of cash in liquid form i.e. Cash ISA + “high” interest savings account. Yep interest rates are pathetic, but that’s not the point here. Once I’d paid off the mortgage I accumulated a nice cash cushion and leveraged that for greater freedom.

B) It doesn't have to be a binary decision. Do a bit of everything. So if you had say $1,500 a month left over you could make a $500 overpayment on mortgage, $500 to investments (low cost index tracker say), $500 to tax-free cash savings. Do though take advantage of any employer-related pension scheme - make sure you get the maximum employer contribution and the tax relief. If you are contracting it is especially important to use a private pension to reduce your tax bill.

C) Is your house a good strong house in a fluid market? In other words is it in a good location where it is not too difficult to sell? If you think you might ever have problems selling I would get shot of the place as soon as possible rather than pay off the mortgage.

D) Related to the previous point. Could you downsize? You could perhaps then reduce the mortgage or pay it off and still have other money to invest.

At the end of the day there is really no one right answer, only the right answer for you.

I'd pay off the mortgage -- as long as doing so would leave me with a comfortable cash cushion.

It's simple if you just maximize for your personal needs. Pretty much everyone saying invest is attempting to maximize for the largest amount of money by the time they die. Not the least amount of risk, the most comfortable life in aggregate or the biggest amount of runway for bootstrapping a business.

You don't need a tonne of money. You need enough. Particularly if you want to hack on your own stuff you want to reduce your personal risk and increase your emotional stability. If you can lock in only needing one income then you're free to do your thing.

On the investing side it depends how much money you have. I don't know if you know about the 4% "safe withdrawal rate" but it's a good number to base calculations around to understand whether or not the amount of money you will be coming into is realistically enough for you to actually become financially independent on investment income alone. My guess is you might not be in that position with the amount you will come into. The other thing being the emotional rollercoaster of the market is pretty real. These are golden times now which means rough times are likely right around the corner given the last crash was 10 years ago and they cycle pretty regularly around 8 to 10 years. If you pay off the mortgage now and keep working then save a tonne of cash from working and when everything crashes hard use that large cash position to invest at a discount then dollar cost average your work income through the recovery you'd be minted.

The other thing is nothing is stopping you from doing both. Pay off the mortgage and then keep working and pump all that money into index funds for a few years or a rental property which can bring in a stable income. You'll be on easy street in no time.

Either way it's about outcomes and what you're personally optimizing for.

Paying off the house is investing in yourself. Once you’re not strapped with an oppressive mortgage every month, you’ll be free to focus on your own projects, as you see fit.

Paying off the house locks in your return and reduces your monthly expenses. Investing the money gives you more upside but also downside.

Coincidentally we wrote a tool that helps model these kinds of decisions - https://www.wealthmeta.com/incomespending/new

Can't tell without the numbers. You have to do the maths. Your mortgage is the cheapest loan you will ever get - often you will be in profit by investing elsewhere, even in a safe investment, even accounting for taxes.

If you are undecided, I advocate an "offset mortgage" if you can get one - it is the best of both worlds: you keep access to your cash but it reduces your mortgage payments when you aren't using it.

You don't say where you are which does make a difference in this world.

I'm in the UK and I LOVE this flowchart made by the awesome people at the UKPersonalFinance Subreddit. I highly suggest finding a group for your area.