Pay down mortgage or invest?

[Acesover8s]

Hi,

Thanks to the advice of the posters on this forum and internet poker players world wide I just bought my first home, and now am in debt for the first time in years.

My initial plan was to pay down the mortgage as quickly as possible, as I have no prepayment penalty, and I assume that after the US government finally has their way I will never make this sort of money again, whenever that may happen.

But, alternately I was thinking that investing the money, say in a series of index funds would be a better idea, since I don't have to even beat my mortgage rate to profit from this due to the tax credits.

Am I on the right train of thought here? Or would it be better to just get myself debt free as soon as possible? Is there a better option for a clueless investor than index funds? What rate of return should I look for before it goes from close decision to invest?

Thanks in advance,

aces

[Mars357]

Would you borrow the money via a second mortguage to invest it? If you put it toward investments rather than pay down the mortguage, you are basically doing the same thing...

Dave Ramsey would be so proud of me... [img]/images/graemlins/smile.gif[/img]

[Acesover8s]

I understand your point clearly, but I guess I'm saying I don't know if I would do that, because I feel like I may be missing some crucial information.

Clearly it seems like the best thing to do would be to invest rather than pay down debt anytime I can get a better rate, obviously it would always be correct to invest at 7% by borrowing money from someone else at 6%. I guess I am unsure as to the tax implications, variance in medium term stock market investing, etc.

I appreciate your response, and who the hell is Dave Ramsey?

[DesertCat]

It really depends upon your time frame and bankroll. If your investment time frame is 10-30 years, you are highly likely to do better in an index fund than in your home mortgage at current rates.

But consider your bankroll. You have chosen a profession that suffers from much higher volatilty than even the stock market, your poker portfolio (bankroll) will certainly be up and down significant percentages each month. So if you hit the "perfect storm", i.e. a bad losing streak combined with a bad stock market, you'll be forced to sell your index funds at the worst time possible, killing your long term returns. If you do it in the wrong proportion, it's like playing high limits with a 60BB bankroll, destined to fail. If you invest that money in paying down your home equity line, when you have bad runs you can just draw on the line again. Unfortunately your mortgage doesn't work this way.

Another issue is that if you miss payments on your mortgage or home equity loan, you can lose your house. You want to make sure you can avoid this.

My recommendation would be to carefully consider the size of your bankroll and your mortgage. I would first pay off any home equity line to provide you with a buffer for emergencies and losing streaks (and maybe a savings account if you need more as well). Then you might think about putting a share of your excess into paying the mortgage down, with the rest into index funds. If your montly mortgage payment is reasonably high, after time, you might be able to think about refinaning and lowering your mortgage payment. Once again this will help keep your monthly expenses down when you hit losing streaks.

Good luck...

[SossMan]

This is really good advice...excellent poker analogy. Obviously, it may be better trade EV for reduced variance (pay down your mortgage) and to avoid bankroll disaster (missing payments and losing your home and ruining your credit).

Just as an addition...you may think about getting a loan with payment options (the option to make a minimum payement and defer interest). Your ability or willingness to get this type of loan would depend on a number of factors including your current loan product, loan to value, credit, etc...

good luck

-sossman

[sublime]

Aces-

In would have a read of some of Ric Edelman's work

Ric Edelman

I am pretty sure he goes into this exact question in one of his books, and his answer was to take your time paying off a mortgage as it is the best loan you will ever take.