Invest or make extra payments on mortgage?

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FrugalNexus
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Invest or make extra payments on mortgage?

Postby FrugalNexus » Sat Apr 06, 2013 7:40 pm

Hi,

My wife and I are building a house, which will be done around June. We are putting 20% down on a conventional loan to get rid of PMI and decrease our monthly mortgage payment. Our 30-year fixed mortgage rate is going to be ~3.6% on a $205,000 loan.

Is it financially better to make extra mortgage payments of about $250-500 each month to pay off the house quicker or should we invest those extra payments in the stock market?

Here is some of our info:
Both 29 years old - no kids at this time, but are hoping to start a family in the near future.
Gross income combined of 115k-120k per year with a 1-3% raise each year.

Roth IRA Vanguard Target Retirement 2050 - we are both contributing max each year (I started ~5 years ago and she started this year) ~$37,000 combined
Roth 403B - we are both contributing 4% of our income to get the 50% company match ~$6,000 (Not vested yet)
Checking - ~$11,000
Savings - ~68,000 ($51,000 will go do house down payment at closing; currently we are putting $4,000 into savings every month)
Car loan- $3,000 left
Student loan - $3,000 left
Credit card debt -$0 (pay cards in full every month)

I was thinking about putting a $250 extra mortgage payment each month and investing the extra $250 per month in the Vanguard Total Stock Market Index Fund. I have never invested in the stock market besides our retirement funds.

Is this too risky with the new house purchase? I am planning to purchase a SUV in 1-2 years since my current car is ~18 years old.

Any tips or recommendations?

Thanks,
FrugalNexus

VinTek
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Re: Invest or make extra payments on mortgage?

Postby VinTek » Sat Apr 06, 2013 7:54 pm

We actually had that discussion here. You can read different viewpoints.

The circumstances of that thread does differ in details. The couple in that thread are closer to retirement than you are, and are talking about a lump sum rather than excess earnings. However, the essence of the issue is the same: what to do with extra money over and above the amount needed to pay the mortgage.

So have a look at that thread and come back to ask more questions. It really boils down to this: do you want to reduce your risk by reducing your mortgage or are you willing to keep your risk level where it is to get more (potential) growth?

DaveInPgh
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Re: Invest or make extra payments on mortgage?

Postby DaveInPgh » Mon Apr 08, 2013 8:32 am

I think Vintek's last comment sums it up really well.

Although I am now aggressively trying to pay off my mortgage, that was not my focus almost 10 years ago when I obtained the mortgage. My extra money went toward retirement.

I am curious what the rates are on your car & student loans?

stannius
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Re: Invest or make extra payments on mortgage?

Postby stannius » Tue Apr 09, 2013 7:53 pm

I would definitely pay off the student loan before putting any extra on the mortgage.

Jerry
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Re: Invest or make extra payments on mortgage?

Postby Jerry » Tue Apr 09, 2013 10:45 pm

You're managing your finances quite well!! :) It is a good idea to pay some extra amount on your mortgage so that you pay it off early and save money on interest payments in the long run. Considering that you have $500 extra every month, you can pay a certain extra amount toward your mortgage, put down a part of it in an emergency fund (this is very important) and invest a part of it in Vanguard Total Stock Market Index Fund. But it should also be noted that stock markets can be risky. So, unless you have in-depth knowledge about this subject and have an idea about risks, it’s better not to invest in this field.
Jerry
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frugalcoconut
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Re: Invest or make extra payments on mortgage?

Postby frugalcoconut » Sat Apr 13, 2013 5:14 am

My primary recommendation is to start saving for your next vehicle purchase to be in cash to avoid having to get a loan.

Since you will be actively pursuing bringing children into this world, I would suggest setting aside something for your future family to cover medical bills (depending on how good your insurance is), etc.

Since you are only contributing the minimum toward the 403B, I would suggest upping that to benefit from its tax-advantaged status -- unless the investment options are poor (e.g. high expense ratios) -- before investing in a taxable brokerage account.

dougmccoy
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Re: Invest or make extra payments on mortgage?

Postby dougmccoy » Mon Apr 22, 2013 10:03 pm

you're definitely managing your finances well. i'd also add extra on the mortgage too but investing in the stock market would be quite risky if you're not really well informed with that area.
The ReCreation King!

VinTek
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Re: Invest or make extra payments on mortgage?

Postby VinTek » Tue Apr 23, 2013 7:58 am

dougmccoy wrote:you're definitely managing your finances well. i'd also add extra on the mortgage too but investing in the stock market would be quite risky if you're not really well informed with that area.

Why do you believe that?

stannius
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Re: Invest or make extra payments on mortgage?

Postby stannius » Tue Apr 23, 2013 8:01 am

VinTek wrote:
dougmccoy wrote:you're definitely managing your finances well. i'd also add extra on the mortgage too but investing in the stock market would be quite risky if you're not really well informed with that area.

Why do you believe that?


It's just a spammer.

VinTek
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Re: Invest or make extra payments on mortgage?

Postby VinTek » Tue Apr 23, 2013 8:03 am

stannius wrote:
VinTek wrote:Why do you believe that?


It's just a spammer.

I know. But he could be an object lesson for other readers if we demonstrate the flaws of his product. It's worked out rather well with another poster. And besides, Whack-a-Mole is more fun when you have more than one mole.

stannius
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Re: Invest or make extra payments on mortgage?

Postby stannius » Tue Apr 23, 2013 8:49 am

VinTek wrote:I know. But he could be an object lesson for other readers if we demonstrate the flaws of his product. It's worked out rather well with another poster. And besides, Whack-a-Mole is more fun when you have more than one mole.


Could be fun... But I suspect this one is "just a spammer", just robo-commenting with a vague but seemingly relevant comment in the hopes that someone will not realize he is a bot and will click on his signature link or whatever.

VinTek
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Re: Invest or make extra payments on mortgage?

Postby VinTek » Tue Apr 23, 2013 9:03 am

stannius wrote:
VinTek wrote:I know. But he could be an object lesson for other readers if we demonstrate the flaws of his product. It's worked out rather well with another poster. And besides, Whack-a-Mole is more fun when you have more than one mole.


Could be fun... But I suspect this one is "just a spammer", just robo-commenting with a vague but seemingly relevant comment in the hopes that someone will not realize he is a bot and will click on his signature link or whatever.

Good point. But we'll find out if he replies, won't we?

RayinPenn
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Re: Invest or make extra payments on mortgage?rnied

Postby RayinPenn » Tue Apr 23, 2013 9:42 am

A couple of thoughts
1) Does the $11k in checking cover 6 months of expenses? if not build it up a bit first
2) kill the car loan/student loan next.
3) I am a big anti debt guy so I would put any extra the mortgage next (which is what i did) but there may be some satisfaction to be gotten by putting 1/2 in a mutual fund and 1/2 into the mortgage. -- after a few years growth and dividend income on the investments may provide a bigger sense of financial security. That is what really counts! You will get to the same place at the end.

For me the mortgage burning party was the best party i ever attended!

Either way live simply, save and avoid the toys....
You'll do well.
RayinPenn

“If you tell the truth, you don't have to remember anything.”
― Mark Twain

kombat
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Re: Invest or make extra payments on mortgage?

Postby kombat » Tue Apr 23, 2013 10:03 am

stannius wrote:I suspect this one is "just a spammer", just robo-commenting with a vague but seemingly relevant comment in the hopes that someone will not realize he is a bot and will click on his signature link or whatever.


If there had been a spam link in his signature, then either bpgui or I would have already deleted the posts and banned the account.

FrugalNexus
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Re: Invest or make extra payments on mortgage?

Postby FrugalNexus » Fri Apr 26, 2013 6:22 pm

Thanks for the replies guys.

The student loan is actually around $10,000 (asked the wife a while ago when it was $3,000 - she went back to school for a second degree) with a ~6% interest rate, so we will be getting rid of that first before anything else.

The car loan with ~3% interest rate should be paid off by the end of this year with minimum payments, so we will put any extra payments towards the student loans first.

RayinPenn, with the new house, about 13k will cover 6 months of living expenses, but we will have more than that left over in the savings account.

Thanks,
FrugalNexus


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