Mortgage vs ETF
I currently have stocks worth $500K and I have an outstanding mortgage of 500K @ 3.5%. I have been debating to myself on closing my loan vs investing the money on ETFs. Did a basic math and I would like to know if this math is reasonable. Option 1: Keep the cash and invest in ETF. Base Amount: 500k Monthly Investment: $0 Period: 5 years Rate of Return: ~10% yearly (assumption) End of 5 years: Gross from ETF: ~822k Principal: ~500K Interest: ~322k Interest after 20% taxes: $257K Net from ETF: 500 + 257 = $757K Outstanding mortgage principal: ~400K Net cash: 757 - 400 = $357k Option 2: Close the loan and invest the mortgage payment in ETF regularly. Base Amount: $3600 Monthly Investment: $3600 Period: 5 years Rate of Return: ~10% yearly (assumption) End of 5 years: Gross from ETF: ~284K Principal: ~219k Interest: ~65k Interest after 20% taxes: $52k Net from ETF: 219 + 52 = $271k Net cash: $271K If you were in my shoes, which option would you choose?
Apart from the obvious return difference (even say 8% in the stock market vs 3 % on the house), don't lose sight of two things: 1. The house is the best 5x leveraged investment normal folks can make, no one giving you that kind of $$ to invest in the stock market but if you buy a house, they give you 80% loan and tax deductions on top of that so no point giving that up if you are going to stay in the house anyway. 2. If you pay off the mortgage, all your money is focused on one specific investment in one specific location and you don't have any diversification - if the house gets flooded and you don't have flood insurance, you lose everything. If you have a mortgage on it, you can at least walk away with the bank left holding the bag in the worst case scenario, they can't come after your other assets in the US.
Great perspective. Thanks
Invest, but 10%/year is probably very unrealistic for the medium term. Those returns were only possible in an environment where interest rates were constantly dropping. If your mortgage was at 6-7%, it would potentially make sense to just pay it off, but pretty much any investment vehicle will return more than 3.5%/year. That said, many people find comfort in having a paid off house, regardless of whether it's an optimal financial decision or not. There's something to be said for not having to worry about bringing in enough money to cover monthly expenses, and the value of that is highly personal.
Thanks for the explanation. I was thinking along the same lines. But looking at the returns, I don’t think it’s much of a difference for a 5 yr period right? Paying off absolutely gives a peace of mind but I also lose time for compounding the money I have. A tricky situation to be honest
It's probably not right to look at an arbitrary 5 year period, unless this is simply how long you have left on your mortgage at the current repayment rate. If you have, say, 20 years left though, your math changes rather significantly in the ETFs vs mortgage decision. As the other poster mentioned, a house is not diversified and, we might also add, highly illiquid. You can sell part of your stock portfolio in an emergency, but you can't easily sell a part of your house. You'll be hard pressed to find advice to the contrary. Mortgages are a very lucrative form of loan in the US, one that is very favorable to the borrower. This seems unlikely to change soon, because most voters are home owners and have a mortgage. At the very least, maybe wait to pay off your mortgage until you're in a situation where you'll still have a lot of liquid assets left over for emergencies/prolonged unemployment.