debt or investment questions? confused..

  • Have a couple of loans and I cannot for the life of me figure out what makes the most sense in terms of trying to wipe them out or just invest the money and ride them out.

    1 mortgage @ 215k, 4.2%, 30yr term, 30 yr amort. (primary residence) monthly pmt ~1700

    1 mortgage @115k 5%, 10 yr term, 25 yr amort (business) (monthly pmt ~700) - 5,4,3,2,1 prepay

    Biz loan @275k, 4.5%, 10yr term, 10 yr amort. (monthly pmt ~3000) 5,4,3,2,1 prepay

    Second year in business. First year net was $200k. On track this year to do $300k net. My gut thought was to wipe out the 10 yr term mortgage even with the 4% prepay penalty as I am basically only paying interest to hold it and will still have to pay $80k at the end of the loan term anyway. Then maybe try to bump the other 2 loans by $1000 each monthly in terms of payment so they get paid down sooner. And then invest whatever is left after taxes and life expenses. Or do I just ride those out at the current interest rates and invest all proceeds after taxes / expenses? Or should I be dumping everything into investments and just hold the loans as they are all 5% and below? When I calculate how much interest I would pay over the life of everything I feel like I am just throwing money away for nothing…

  • When I calculate how much interest I would pay over the life of everything I feel like I am just throwing money away for nothing…

    There is a popular mis-conception that when you are paying interest, you are throwing money for nothing. What you really have to look at is 2 things:

    1. How much is it costing you to borrow some money per year (after taxes)?
    2. If you took the same money and put it to good use, how much would you earn on that money (after taxes)?

    The reason for doing it after taxes is to adjust for the fact that stock appreciation/dividend income is taxed at a lower rate and mortgage interest deductability has become very limited. Don’t know how the biz loan works for that purpose.

    If 2 is more than 1, then you are definitely not throwing money away. If 1 is better than 2, then yes - you are throwing money away. But you also have to factor in pre-payment penalty - i.e. if 1 and 2 are the same, 2 wins because it has no pre-payment penalty.

    Answer to #1 is probably simple. Answer to #2 - depends on your risk tolerance etc. 95% of the guys on these forums hear stocks/options and they start wetting their pants. Given that, I think the answer is that you probably should pay off. Also, if there is no deductability of interest, I would take the “assured” 5% return by pre-paying early. But if there is deductability and the real interest rate is 3%, I would invest that money for the long term.


Looks like your connection to PhatWallet was lost, please wait while we try to reconnect.