I’m facing a tough decision and I’m hoping to get some input from you all. I’m not sure if I should just keep my investments or use them to pay down part of my mortgage. I know everyone’s situation is different, so I’m just looking for things to think about.
My wife and I (both in our late 30s) recently took out a loan for an apartment. After covering the loan and expenses, we’ll have about 20% of our combined monthly income left. We plan to use most of that to pay down the loan and keep some aside for future needs.
Back in 2022, we also made some investments in a global index fund and a US tech index fund, thinking it could be our retirement savings. Now, I’m wondering if I should use that to pay off part of the mortgage instead. The investment could cover about 40% of the loan.
Some reasons I’m considering this:
I really dislike having loans and paying interest to the bank.
With all the uncertainty in the world, I worry more about the loan than about the potential returns from the investments.
The market seems overvalued right now, though I don’t really know what will happen.
I’d rather have something tangible than just money sitting in the bank, and getting rid of the debt would free up expenses that could be used to pay down the loan faster.
If I use an average return of 8.2% on the MSCI index, I see that the money I make from my investments might be close to what I’d pay in interest on the loan over the same period of time.
Am I overthinking this? Does it make sense to use my investments to pay down the mortgage, or should I stick with the plan and let the investments grow?
Here’s some info about my situation:
Investments: $200k invested, worth about $280k with returns (before tax)
We don’t have much in other savings outside of the mandatory retirement accounts from our jobs, which are pretty small.
Mortgage: $320k loan at 5.34% interest and $380k at 5.45% interest (the second loan can be refinanced). If we pay down $300k of the debt, the interest rate might be slightly lower.
Floating interest rate, so the loan rate could change.
Average monthly income: $7k after tax.
Average monthly expenses for the property: about $4.3k.
Keeping the investments and taking out the loan is likely the better option.
If things get tough, having those investments as a backup is important. Paying down loans is fine, but it won’t help if you can’t make the next payment.
I always thought taking the loan and investing would be the right move, but now I’m having second thoughts for the reasons I mentioned above.
Maybe I’m being too emotional about it. Still, with all the uncertainty in the world, I’m really wondering what will happen to my investments, not just in 20 years but even in the next few years.
@Sam
Paying down the loan means you won’t have to worry about making a payment if things go wrong. You also take a lot of risk off the table. Once you pay off the loan, it’s done. But your investments could take a hit overnight. I agree, the stock market does seem overvalued, and a correction could be coming soon.
@Zen
I agree with you on the market being overpriced, but there are so many factors right now that could impact it. On top of that, with all the political tensions, it’s tough to know how things will turn out. For example, issues like the US-China relationship and Europe’s energy transition could cause some unexpected disruptions. That said, paying off the loan is a definite guarantee, while the market could be a gamble right now.
Check out Dave Ramsey on YouTube, he shares a lot of useful advice. He believes paying off loans (including mortgages) is always a good idea. Sometimes it’s not just about returns, peace of mind is important too.
@Zen
I’m not a big fan of Dave. He gives blanket advice to everyone. It’s good for some people, but might not be the best option for everyone’s situation.
Tan said: @Zen
I’m not a big fan of Dave. He gives blanket advice to everyone. It’s good for some people, but might not be the best option for everyone’s situation.
Yeah, his advice works for people who are struggling financially. If your finances are already under control, though, his approach might not be the best long-term.
I get how you feel about debt. I have a 0% loan myself and I really hate it. But at your interest rates, it’s not a huge financial loss either way. However, the mental stress of having a loan might make it feel like paying it off is more urgent. If you can pay off one loan and focus on the other, I think that would be the best option for your situation.
@Zuri
Glad I’m not the only one who feels this way about loans… Thanks for the advice!
I forgot to mention that the interest rate is floating, so it could change, but for now I’m just looking at the fixed numbers. Also, we don’t have much saved outside of retirement accounts, which are pretty small.
@Zuri
I felt the same about a 0% loan a few years ago. I held off on paying it off at first because it felt like free money. But when I paid off my mortgage early, I really enjoyed the peace of mind. Sometimes it’s about that feeling of being completely debt-free.
Are you in the US? What are the tax implications? If you’re in a high tax bracket, the taxes on your investment gains could make the decision harder. Also, is your loan going to be recast every year? That could make paying it down more attractive.
I’d recommend paying off the loan. Some people can handle the ups and downs of the stock market, but if you’re already feeling anxious about things like the economy and overvalued stocks, it might be better to get rid of the debt now while the market is high. That way, you won’t be tempted to sell at the wrong time if things drop.
I’d split it. Maybe pay down some of the mortgage to ease your mind, but don’t cash out everything. Those interest rates are tough, but selling all your investments feels too extreme. You can have the best of both worlds.
Paying a little extra each month is fine, but don’t make a huge payment unless you can pay off the whole loan. If you can’t keep up with payments in the future, prepaying won’t do much good.