Paying Down Mortgage v. Investing

[womanonfire]

So after more than half a life of not saving or investing, I find myself in my 50s, in Chapter 13 and looking towards the future. I have NOTHING set aside for retirement unless you want to consider around 2k worth of stocks that are steadily losing value my home the latter of which is my best chance for investing.

The interest rate on the house is 5%. I missed out on refi opportunities because of litigation with mortgage company and horrible credit. I read that by the time I get out of bk, then the interest rates might be well above 5%.

If I can't get a guaranteed return on any investment of 5%, then isn't it best to try and pay down the mortgage rather invest? If no, why not?

[shipo]

You're more or less in the same boat I was in 2015 when I filed for my Chapter 13; I was in my late 50s, all of my investments had been consumed, I'd lost my house, I had a 14 year old car (which rusted away during my 4th year of my Chapter 13), and had just started a new 401(K) plan with my new employer. In my case, I ramped up my 401(K) withholdings to the IRS maximum, my (now former) company had a whopping 10% match, and in the space of the next six years that fund had grown from zero to over $330,000 when I left the company. Keep in mind, this was partially due to the large annual contributions, but also due to the single fund I put the money into.

Fast forward one year and markets are in huge turmoil and yet I still believe investing is the path forward. This Ukrainian war won't last forever, COVID seems to be on the wane, and my bet is we're going to see a reprise of the Roaring 20s, 100 years later. Said another way, 2022 is probably going to be a huge bust for investors, however, beyond that, I don't see any benefit to paying down your mortgage versus investing. Think about it this way, investing when the markets are down allows you to buy in when prices are depressed; you'll essentially be buying more for less.

[womanonfire]

Thanks shipo! I'm glad to hear that you managed to invest some.

Can you explain this return on investment better? I don't know how to crunch the actual numbers to see math. It still somehow makes sense to own a home free and clear and to also be able to use that for rental income later.

[shipo]

LOL, talking to your accountant will probably be a better approach, but I'll cover what I can.

It has been a long time since I was a landlord, like decades, at the time it was impressed upon me by my accountant to NOT pay down the mortgage for rental property; I don't remember the exact rationale, but it had to do with tax advantages relative to the rental income.

As for return on investment comparisons between investments and paying down one's mortgage, I can only go by my experience which, over the last 40+ years sees conservative investments in mutual funds and such returning between eight and ten percent annually on average; some years were near zero (or even below for a couple of years, 2008 and 2022 for example), other years were over twenty percent.

[womanonfire]

I'm revisiting this post in the off chance someone can give me something to consider as I received an offer of a loan modification that would reduced my current 36 mo. bk payment by $700 per month, which in turn could be used to invest. The UPB on my home is $110,000 on my home plus arrearages. I'm supposed to be paying escrow and I am not because my now approved plan said I would pay it myself. The plan also reduced their claim from around 37k to 34k. The remaining interest owed is around 58k and in 18 years, it's paid off.

The loan mod UPB would be 134k, 30 year term at 5.5% interest. Even if my attorney counters with ok but make the interest 5% to match the current rate, I'm paying an additional 82k in interest and owing into my 80s. This seems like a raw deal because even if I were to use some of my savings to pay it down, I'm still going to be paying more in interest.

I supposed the problem that I have is not understanding ROI. Right now, I'm able to save a couple 100 a month and make my current payment. Any thoughts?

[justbroke]

Someone please correct me if I'm wrong, but if you modify a mortgage while in a Chapter 13, that not only requires permission, but the Chapter 13 Trustee will notice. If it reduces your payment to the lender and increases your disposable monthly income (DMI), I would think that the Chapter 13 Trustee would try to modify your plan to include some or all of the difference. I've just never had this issue, so don't know how it is handled.

If you're asking from an investment perspective, I don't think that refinancing a home with 18 years left to a 30 year mortgage, is a good investment. Additionally, 15 and 20 year mortgages have significant advantages including lower interest rates and potentially little to no PMI.

[womanonfire]

justbroke I'm in a 100% plan and I don't know either but that is a good question!

It's not a refi, it is mod but I guess you could look at it as similar. Yeah, this mod offer doesn't sound very good at all.

[justbroke]

Modifications have worked in a Chapter 13 debtor's favor. I know that my bankruptcy district pushes them all the time. Whether or not the mod will work for you may be based on your Chapter 13 Trustee and your district and how they deal with excess "disposable" income after the modification is made permanent. I just can't talk to that.

[womanonfire]

Modifications have worked in a Chapter 13 debtor's favor. I know that my bankruptcy district pushes them all the time. Whether or not the mod will work for you may be based on your Chapter 13 Trustee and your district and how they deal with excess "disposable" income after the modification is made permanent. I just can't talk to that.

I do know that the Trustee initially tried to get me to pay interest and my attorney told him he would fight it hard and he dropped it. The issue is how they can force someone that is in a 100% plan to pay more each month than they are supposed to pay. If I'm supposed to be in a 36 or 60 month plan, and I'm already in a 36, making me pay more than you owe would be forcing me into a 22 month plan and that number doesn't exist in the code.

[shipo]

nancypalmer, please reread the forum rules regarding responding to old threads. Reopening and commenting on old threads is strongly discouraged without a good reason to comment.

[SUNus]

Considering your situation, it's smart to weigh the options. Paying down the mortgage at 5% interest is a guaranteed return, but it's also worth exploring diversified strategies.

[shipo]

Considering your situation, it's smart to weigh the options. Paying down the mortgage at 5% interest is a guaranteed return, but it's also worth exploring diversified strategies.

Maybe it's just me, but I would never pay down a 5% mortgage; that money is far more valuable, to me at least, being invested.

[vhs]

Here is my Friday night ramble on this.

Best move, and I wish I had done this earlier in my life, is to "buy up" my primary residence. Not rental property, but a primary residence. I need to emphasize this point because the primary residence offers an incredible asset protection with the laws in place. However, rental properties are much more riskier.

Explore John T. Reed's work. He is a Harvard MBA, in his 70s, and has the experience in these matters. I bought my first house when I was in my late 20s and got my ass handed to me because of the lying NINJA (No Income No Job No Asset) Loans, that eventually lead to the housing crisis in the late 2000s/early 2010s. I was the honest guy, making over six figures back then, and the "liars" screwed up the market.

This is no longer the case, post "housing crisis", because loans are scrutinized much more.

This creates less risk in buying a primary residence.

Also, I made a huge mistake in maxing out my 401K (I was doing about 12-15K/year at that time) over upgrading my primary residence. 401K is a huge trap, in my opinion, because your money is tied up. However, if you have a stable job situation (teacher, nurse, doctor, plumber come to mind), then the 401k might be OK because you have the continual cash flow. For me, as a corporate replaceable employee in sales, I was downsized six times in my career, and ended up borrowing from my 401k, which was a bad decision and cost me in the end.

So, make sure you can cover yourself in bad times if you decided to go the 401k route. I would suggest substitute teaching if you have the ability to get the job, if you lose your primary job. This is a great way to keep your investments in place, while you are looking for a primary job. If you don't have the education to sub teach, then working at a retail job will do. The key is just work your 4-5 days and get the income.

Buying up a primary residence gives you asset protection for many reasons, among them is that its hard to lose the asset if you make your payments on time. Also, you can live in the asset. Also, you have tax exemptions if you decide to sell your primary residence (up to $250k if you are single, $500k if you are married) on the home. Also, you have yearly tax writes off with the interest. Also, you have opportunity to write off "home office space", if you use the house for business purposes (and probably for schooling purposes too).

Reed covers a lot in his books/articles. But, what I found most fascinating is this: The government rarely, if ever, "messes" with people's primary residences. Its very bad for business. However, they will go after other assets because they are not as well protected.

My personal opinion is that real estate will continue to boom, while the risky and "gambling" stock market and other high risk investments will slowly fade away. The stock market is an information game, and unless you are at the top of the "information pyramid", you are going to lose money.

At the end of the day, my plan, moving ahead, will be to upgrade my 500K house to a 700-900K home in the next 3 years. Then, in 7-10 years, I want to upgrade the 700-900K house into a 1.2-1.5 M house. I can do it because I have the income potential.

Don't stretch yourself out if you follow this strategy. Housing, in my opinion, should account for about 30-40% of your pay, so make sure you can make your monthly obligations without stress. One of the worst moves is to buy a primary residence that stretches your budget and creates problems.

Lastly, Reed recommends homes that are 3500 sq. ft and under, and 1 acre or less, because if you get something bigger, the residence ends up owing you, because of all the upkeep.

I would suggest retired folks go for a townhome or a condo, because there is low stress in managing those properties. Just make sure you buy in a low crime area, and consider who your neighbors are going to be, not the actual property so much. Homes in "mild" climates are also better investments, because of quality of life advantages and you can bypass stressful situations if the power grid goes out, etc.

[SUNus]

Considering your situation, it's smart to weigh the options. Paying down the mortgage at 5% interest is a guaranteed return, but it's also worth exploring diversified strategies.

While a backdoor Roth IRA doesn't guarantee a 5% return, it offers tax advantages and potential growth, which could outperform your mortgage interest rate over time. It's crucial to diversify and consider a mix of strategies to secure your future. Seeking advice from a financial professional could provide tailored insights that suit your unique situation.

[vhs]

Diversification is NOT the way to get rich, though. I am 100 percent sure that "upgrading the primary residence" is the best way to preserve wealth. As long as you can comfortably make the monthly mortgage, insurance, taxes, HOA, etc on the house (I would recommend 1-3 years of cash to cover that), you are going to be in a good situation because of the things I mentioned in my earlier post.

Live in the best neighborhood, or save up until you can. You can protect that asset much better than the "rigged" stock market, or other investments.