Pay off my house, or put it in the market?

September 24, 2007 11:03 AM

Pay off my house, or put it in the stock market?

I have the opportunity, via a "windfall of cash" to have enough money to buy my house. I owe about 40% of the current value of the house. With this windfall, I could pay it off, and have some cash left over.

The other option is that I put the money into the market, where it will (hopefully) get more interest.

The payments aren't a stretch for me now. However, I'll also be unemployed via this windfall, and if I were to pay off my house, I'd have no payments other than ongoing utilities. That would put me in a position to either 1) last a while, or 2) take some risks and go for a big pop at at startup.

So, what do you all think? Given the prevailing winds, should I buy my house, or put it in the market?

Oh, one other thing, I have a variable rate mortgage, that will need to be refinanced in about 1.5 years. Right now, it's reallly low (like 3%) so I expect that it will go up significantly.

posted by wflanagan to Work & Money (26 answers total)

I vote for paying the house off. I do not have a good feeling about the stock market right now (stagnating economy, Fed increasing money supply, etc) and don't think it's a safe way to go, and I don't think buying debt (bonds, etc) is a good route either because of my personal expectations for inflation.
posted by antipasta_explosion at 11:11 AM on September 24, 2007 [1 favorite]

Pay off the house. Then take whatever your mortgage payments were and invest that anyway you please.
posted by fallenposters at 11:19 AM on September 24, 2007 [3 favorites]

Pay off the house. But, yes, get some actual financial advise first.
posted by elwoodwiles at 11:23 AM on September 24, 2007

Pay. Off. The. House. First and foremost you need a place to live. It is your home and should be treated as such, not as an investment.

To me, the paid-off mortgage is far more of a status symbol than any fancy car or piece of jewelry. And you're not going to be sweating bullets when your rate resets.
posted by azpenguin at 11:23 AM on September 24, 2007

While it might be possible to get a higher rate of return in the markets, the risk is also higher. Paying off debt has a guaranteed rate of return at your current interest rate. Generally that's considered the better thing to do.

The Canadian thing to do is to contribute the money to your RRSP and use the tax savings to pay off debt.
posted by GuyZero at 11:30 AM on September 24, 2007

I vote neither. Put the money somewhere where there is a low risk of losing the principal, such as 1-year T-bills. Spend the next 1.5 years looking into refi options for your home. If you can refi to fixed at an acceptable rate before the reset, do so and continue paying on the house, deducting your mortgage interest. You could then invest the money in a higher-risk investment.

If you can't obtain an acceptable refi offer in the next 1.5 years, pay the house off then.
posted by ikkyu2 at 11:34 AM on September 24, 2007 [1 favorite]

Given that you're going to be unemployed, how about 'hang onto the money in case you need it'. You can't be sure you'll get a new job as quickly as you might like, and it'll be a lot more expensive to get a home equity loan to live off once you're already unemployed and broke than it was to get that mortgage when you were employed and had money. And needless to say you shouldn't play the stock market with money you might actually need.

I'd say put it in a high interest savings account or cashable investment certificate until such time as you have a new source of income.
posted by jacquilynne at 11:41 AM on September 24, 2007

Paying off debt has a guaranteed rate of return at your current interest rate.

Exactly. It's really a question of risk tolerance. You can estimate the expected value of sticking the money in the market by looking at futures for index funds in the sectors or markets you would invest in versus the present value of the interest payments you wouldn't have to make. The two figures we don't have are:

1. Your risk tolerance
2. Your mortgage rate

The amount of money in question and your planned investment strategy would also be helpful to answering the question.
posted by yerfatma at 11:43 AM on September 24, 2007

Duh, I didn't read the fine print. 3% is pretty low. You could invest it until the rate goes up. 3% would be an easy return to match, assuming there's no big downturn. Which there always might be.
posted by yerfatma at 11:44 AM on September 24, 2007

Money you invest in the stock market does not earn "interest."

Pay the house off.
posted by Good Brain at 11:55 AM on September 24, 2007

Assuming you are in the US make sure and account for the fact that investment income may eventually be taxed and your mortgage interest is probably tax deductible. Just assuming that you could make more than 3% in interest by investing doesn't necessarily mean it would be better off.
posted by Octoparrot at 11:57 AM on September 24, 2007

Rather then the stock market proper, I would by mutual funds, such as Janus Overseas which has been returning like 30-40% for the past couple years. If you put your money in for a couple of years, you should be set.

You should also be able to add stop orders so that you'd be guaranteed not to loose more then 10% (or whatever) in the worst case.
posted by delmoi at 11:58 AM on September 24, 2007

Assuming you are in the US make sure and account for the fact that investment income may eventually be taxed and your mortgage interest is probably tax deductible. Just assuming that you could make more than 3% in interest by investing doesn't necessarily mean it would be better off

What you said doesn't actually make any sense. If you don't have any mortgage interest, then you can't write it off. In other words, if he pays it off now he won't be able to take advantage of tax breaks.
posted by delmoi at 12:00 PM on September 24, 2007

which has been returning like 30-40% for the past couple years.

Past performances do not predict future....
posted by yoyo_nyc at 12:06 PM on September 24, 2007

Put it into equities, not the mortgage. That is a tax free loan, and mortgage rates are pretty low at about 6 1/2%. With the tax effects built in it is equivalent to around 4% rate or lower depending upon your incremental tax rate. Do you think you can do better than 4% investing the money? I think you can easily do better than that, even if you are risk averse. Paying the house off is way too conservative, IMHO.
posted by caddis at 12:51 PM on September 24, 2007

Debt sucks. Pay off the house.
posted by pdb at 12:58 PM on September 24, 2007

People have asked similar questions a number of times here, so it would be worthwhile to search for them. For instance this question is very related (although not exactly the same).

Whenever I see questions like this, I wonder what type of advice you are really looking for. Are you looking for detailed calculations that show varying assumptions, or do you really just want to conduct a vague poll?

If someone gives you a short answer (like most of the ones above) that answer will be heavily biased by that person's tolerance towards risk, how they feel about the stock market, and their expectations of the future. Without knowing these assumptions, it is difficult for you to match which piece of advice is best for you.

Personally, I am fairly risk averse, I have a strong positive bias towards the stock market, and I think the real estate market is going to continue to trend down in the future. Based on those assumptions, I would prepay your mortgage. It sounds like you have received some kind of large early retirement or severance package. If I was without a job, I would like to have the security of having as little debt and expenses as possible. This would give me the freedom and flexibility to make sure I could find the perfect job for me.

However, in most cases, if you run the numbers, you are likely to come out financially ahead by investing money for the long-term in the stock market, rather than paying down a mortgage. But, like I said, your comfort level doing that would vary. Me, I would prefer to be living debt-free in my house.
posted by bove at 1:03 PM on September 24, 2007

Stop thinking either/or. Having your house paid off is nice, but it eliminates a source of cash, and you will still need cash flow to live, even without an mortgage payment. Obviously you are going to have to have an income plan if you are going to be leaving your current employment, and obviously your windfall is not enough to retire on. So what you really need to do is figure out what you want to do post-current employment and figure out how to best apply this money to reaching that goal.

Short term, it's probably a pretty bad deal to pay off the house immediately when the rate is so easy to beat. You can easily get over five percent on a simple 18 month CD.

Investigate alternative (simpler, lower risk and more liquid) investment opportunities for the period until your adjustable rate comes up - CDs, mutual funds/money market funds are likely best bets. Make sure you understand the costs and risks of any product you invest in.

The US market is very volatile right now, investing in the market is complex at any time, and you have a significant unknown (what conditions for refinancing will be in 1.5 years).

Even putting aside things nobody knows for sure (how the market, interest rates and the mortgage market in general will fare), without knowing your alternative income potentials, the housing market you're in, or your general economic savvy, nobody can really even begin to answer this basic question for you. Whatever you do, make sure you put away enough no-risk savings to carry you through a transition into sustainable employment as the need may arise.
posted by nanojath at 1:11 PM on September 24, 2007

Does your loan have a prepayment penalty? Lots of ARMs do.
posted by mckenney at 2:15 PM on September 24, 2007

Pay off your house, rent it out and live abroad somewhere cheap off the income.
posted by conifer at 2:58 PM on September 24, 2007

Previously.
posted by The corpse in the library at 3:20 PM on September 24, 2007

I vote for "save the money for 1.5 years and make the decision then." It doesn't make too much sense to make the decision now based on what you guess your mortgage interest will be, when you can save it until you know what the situation is.

Especially since, as others have said, it's not hard to find somewhere to save it where you'll earn more in interest than you're paying on the mortgage. (Even easier for you since often you can get higher interest rates the more money you put in.) Check out all your options, but I'd go for a money market account rather than a CD-- your money will be accessible in case something happens in the meantime to change your mind.
posted by EmilyClimbs at 6:30 PM on September 24, 2007

I would put some in the house, some in the market, and some in a "not sure where, but is safe enough in 6 months I'll still have something to put into a house or market." Spread it out some.
posted by brent at 6:55 PM on September 24, 2007

Agggghhh. These pay off your mortgage people who show up in all these threads drive me crazy. They probably keep all their money in an old Mason jar under the mattress. The government is not in the business of handing out money to folks, well, not folks who are not already rich or politically connected. However, there is one very huge exception, the mortgage interest deduction. With mortgage rates lower than reasonable investments, and then you throw in this deduction, you would have to be a fool to pay off your mortgage rather than invest your money in the markets. Rich people get rich by leveraging their investments. Many of them took big risks to get big rewards (which risks could have gone south) but here you can take a medium to low risk, with the government's help, to greatly improve your return over simply paying off a mortgage, and a crowd of people chime in a with a visceral reaction to debt. Don't fear debt, just don't be foolish. If debt means living beyond your means that is foolish. (Don't take on a second mortgage to get that new BMW, etc. ) If debt means maximizing your investments, that is smart. Frankly, statements along the lines of "Debt sucks" if followed will shield you from wealth.

The fact that you might be unemployed makes putting your cash into debt reduction even more insane. You might need that cash to live on. If you give it all to the bank what are you going to buy food with if you face an extended period of unemployment? Do you think you will qualify for a mortgage to get some of that cash back if you have no job? You, of all people who have asked this question here, should be careful to keep your cash in case you need it. Don't pay off the mortgage, but also don't put it much or any of it at high risk or tie it up for long periods of time. Even a quite conservative investment will beat your current mortgage, and probably even beat a refinanced fixed rate mortgage.
posted by caddis at 10:00 PM on September 24, 2007

one thing to keep in mind when you pay off your house is that you automatically get re-branded by the credit monitoring entities as a "renter" and not an "owner" because you no longer have a mortgage. i recently had a cousin go thru this after he paid off his house...he had stellar credit but his rating got lowered afterwards and he only found it out when he went to charge something large on his empty credit card and it was declined because his limit had been lowered without him knowing it. ordinarily not a big deal but the implication is a bummer: you are a steady payer and actually pay off your house early, only to get *downgraded* in your credit report. insane.
posted by monkeybutt at 11:32 AM on September 25, 2007

Um. Why is this an A or B question? I'm not a financial adviser, but I'd guess that one would say to diversify to minimize risk. So.. invest a bit in safe low-return bonds, plan to refinance when your ARM kicks in, put some amount in high-yield mutual funds...
posted by mhh5 at 9:11 PM on July 9, 2008