All right, it’s official: our homeowners-birthday was this August. We’re now 1!!! Well, the house is much older, but our mortgage is one year old now. So it’s our Mortgage Birthday. The kind of present were you get to keep on giving.
We bought our house with a conventional 30-year, 20%-down mortgage. We talked super briefly about paying down more, or paying it off faster, but my Better Half came up with a solid plan: take the 30 year and invest more.
Assuming a market rate of return larger than our mortgage rate, this should pay off over time. Every dollar not paid to our mortgage means we owe about $0.04 at the end of the year….but if we took that dollar and invested it, assuming even a half-decent rate of return of say 7%, we’d have $1.07 now. Three cents profit!
This doesn’t sound like much, but multiply that by a hundred thousand, and all of a sudden you’re talking about enough dollars to pay attention. There are other complications (capital gains taxes, mortgage deductions, etc), but the upshot is you’re using the mortgage as a vehicle to allow you to both live in a house and invest, instead of one or the other.
This isn’t exactly a get-rich quick scheme, but over the course 30 years this could result in lots of extra dollars…all thanks to my wife and her spreadsheets.
There are potential pitfalls, of course. If instead of investing the difference, you spend even part of it, you’ll suddenly find yourself on the negative side of things. So back to our simplified example, if I bought myself some 5-cent candy because I deserve it, I’d end up with a 2 cent loss at the end of the year. Not that I don’t deserve candy, but I shouldn’t be buying it on what is essentially borrowed money.
The other big factor here, of course, is the market. The market has always gone up in the long run. The whole game here is based on the assumption that it will keep going up. Now that’s probably a ‘fairly’ safe assumption, depending on your appetite for risk. If you can’t stomach even a 1% chance of not breaking even at the end of 30 years, then this isn’t for you.
We’re both young, optimistic, and heavily into stats and numbers and all that good stuff, so that hasn’t put us off so far. But how are we doing, one year down the road?
I have no idea.
All right, well in my defense it’s a long term investment. You shouldn’t be looking at your returns on a daily or even monthly basis, worrying whether the market’s up or that Warren Buffett recently bought a purple tractor… what does that mean, does that mean I should sell?
But I’m naturally a very hands-off (read: clueless) person, so I should probably take a peak. Going to make some rough estimates, and then I’ll let my wife fill in the specifics. Probably a good idea to have a financial state of the union conversation anyway.
Google tells me that on August 20th, 2015 the DJI index was at 17,348.73, down a couple percent from the day before. On August 20th, 2016…well that was a Saturday, but it closed on the Friday (August 19th, 2016) at 18,552.57. Also lost money from the day before. In the interim, however, it managed to make some nice handsome gains.
Ignoring our specific investments (because I’m too lazy to look them up at the moment), the fraction works out to 1.0694, or a 6.94% gain. Hooray, we’re in the black! Didn’t quite hit my arbitrary 7% mark, but almost impressively close for a random sample of 1.
Let’s make a totally-not-interesting chart of all the data points we have so far:
The graph above shows all our individual yearly rates of return (read: the one blue point), as well as our mortgage rate. If we dip below the red line, we’re doing worse off for not paying off the house as soon as possible, otherwise we’re doing okay. And are we doing okay? After one year, the short and not-really-accurate answer is yes.
I wouldn’t have been either a) surprised or b) discouraged if the answer was no…what will be more interesting is seeing this 10, 20 and finally 30 years down the road when we have a lot of yearly data points, as well as a solid thirty year average.
All right, I’m going to leave some space here for some specific details, after consulting with my wife:
Did we invest what we expected to in the past year? Pretty much, take a look at our Net Worth prediction.
Percent income to house? Here’s some rough numbers (as a percentage of gross income): 9% to mortgage, 3% to real estate taxes, 0.5% to insurance, 0.4% to repairs / maintenance.
Percent income to retirement/investments? Sheesh, you ask tough questions. Again percentage of gross income: 31.4% to retirement / deferred compensation, 3.9% to Roth, 15.5% to taxable investments / savings.
Rate of return from investments ? Just looking at Vanguard, the rate of return over the last one year period is 9.1%. I’m not going to look up the retirement accounts because we hold the same investments in those, and also I’m lazy.
Have we gone off track, by buying fancy stuff? Well, we took that cruise to Alaska which probably cost us about $6k even though I keep talking about how “frugal” it was. But, we’re still on track for FI based on our net worth.
Okay, I’m back!
It looks like, for this year at least, we gained by investing our ‘extra’ money instead of paying down extra to the mortgage principle, and we’re more or less on track with our predicted savings. We also haven’t gone off the rails by buying expensive extras. This is just the first step on a thirty-year journey, but so far we haven’t gotten lost. One step at a time!