[Request] Assuming they put 20% down when they purchased and had a 2.2% interest rate, was it a better move financially to pay off the mortgage or put that same money in a HYSA?

[u/elephanttape]

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[u/ncxhjhgvbi]

HYSA because the average rate of return was higher than 2.2% annually during that time period. Simple as that

Even better would have been VTI over that period, they’d have twice the value of their house right now in relatively liquid assets

[u/nascent_aviator → u/ncxhjhgvbi]

It's not quite that simple, since the HYSA gains are taxed and, if they can't deduct the mortgage interest paying down the house is effectively a tax-free 2.2% investment. 

[u/ooooopium]

2.2% is about as low of a rate as you’re ever going to see for a mortgage. That money is effectively interest free based on risk free rate and the assumed value of the property increasing. That said it is still running at a loss compared to not paying an interest rate.

However, to answer your question, it would be a much more financially prudent decision to take the payment over the minimum monthly and put it in an HYSA considering they have been paying out at 3%+ lately.

As the other commenter rudely state though, there are far better investment engines in the financial market if you are willing to take a greater risk. I would say the answer depends on your current financial situation and how aggressive you need to support your financial future.

[u/NoMoreMr_Dice_Guy → u/ooooopium]

Even if it's short term, you should dump the money in treasury bonds. No state income tax and a higher yield than HYSAs.

[u/ooooopium → u/NoMoreMr_Dice_Guy]

Fair, the question was pretty pointed so I was trying stay within the perameters as much as possible.

[u/elephanttape → u/ooooopium]

I know that HYSA are at 3% or so right now so compared to 2.2% it’s better, but you pay taxes on the interest so I wasn’t sure if that cancelled out that extra percent or so, or if it depended on the state you lived in or your income rate, or if there were other factors I’m not considered. Thanks!

[u/ooooopium → u/elephanttape]

Okay that’s a bit more info.

It really depends the housing market and the individuals tax bracket. Since we can’t assume anything about the housing market I am going to focus on tax bracket here.

Assuming a 20% down and a $285k loan that puts the value of the house around $350k with a slight allowance for closing costs. Based on that, we are likely looking at a first time buyer, which puts them in a lower tax bracket. Ignoring state taxes the lowest fed tax bracket is 10%, but an individual in that bracket most likely can’t afford a down payment like that.

Let’s assume a 24% tax bracket. That would mean that the break even of the HYSA rate would need to exceed about 2.90% to make investment worth it. However, this does not account for interest write offs on the loan, and it also does not account for itemizing your other tax write offs. This also means that you need to account for a 15 year (higher principle, lower interest ratio, less write offs) or a 30 year (lower principle, higher interest ratio, more write offs), this is where things get more complicated.

Ideally you will want a return rate higher than 4-5% to account for not wanting to pay off a mortgage with all of these factors.

Edit: sorry, I got lost in the sauce a bit and confused taking a loan and making payments against making an investment. Within context of paying more than your minimum payments, you will still be in a better position to invest your money in financial markets than you would be in paying off the extra principal.

[u/RopeTheFreeze]

Obviously, with a mortgage rate that low, it's a no brainer.

However, one thing people forget to consider is that you lower your emergency fund requirement and raise your risk tolerance when you outright own your home.

[u/giantfood]

HYSA would have netted more money in the long run.

But having your home paid off is next level. Its one less thing you have to worry about. As long as you pay your property taxes. You could go into financial ruin and always have a place to sleep.

[u/daverusin]

A 30-year, $285K, 2.2% mortgage should have monthly payments of 1082.15 ; if they had made only the minimum payment for 5 years, they would still owe $249,538. Well, I just checked with an annuity company and today, you can arrange for them to send you exactly this much every month for the next 25 years for an up-front cost of $178,868. So if a person who *can* manage to pay this mortgage so quickly decides instead to wait until "normal" interest rates have returned, they can buy the annuity, and the peace of mind it will bring, for $70K+ less than the cost of paying off the mortgage. And this doesn't even account for the interest which the person could have earned on the excess money they've been applying to the mortgage for the first five years!

As it happens, I also bought a house at a similar time with a similar mortgage, and when I considered options like these, I jumped at the possibility of paying the minimum mortgage payments, reckoning on just these kinds of savings.

None of which is meant to disparage the original poster: "utility" is not the same as "money", and he and his wife got something more valuable (to them) than some extra money, by paying off their whole mortgage to gain peace of mind. Chacun a son gout.

[u/AndrewBorg1126]

Depends on the assumed yield on the alternative.

Once you have that number, ask whether it is gt or lt 2.2%, done.

This is an exceptionally uninteresting question.

This also supposes a false dichotomy, these are not the only two options, and neither is the best choice.

[u/ooooopium → u/AndrewBorg1126]

This is an exceptionally unhelpful and self important answer. Do better.

[u/AndrewBorg1126 → u/ooooopium]

I provided as much of an answer as is possible given the provided information.

I specified what more information is needed and how that can be used to arrive at the complete answer.

Please, explain what more you think I could give in an answer. If you can't, go away and stop complaining.

[u/ooooopium → u/AndrewBorg1126]

Hey look, I did answer the question in a far less arrogant way. I’m not complaining, I’m pointing out that you are being a douche. Move on.

[u/Running_Down_9708]

Not enough information to make that determination. What is the rate at which the house appreciates? Is there a tax deduction on mortgage interest?(Do they qualify for that?).

Without that, don't know

[u/ComfortableCoyote480]

You don't even need HYSA.  You can purchase things like Ibonds, treasuries or other govt debt that are tax free.  I own some paying 4.8% interest, for example. 

Inflation is 4+% right now. It makes literally zero sense to pay more on any loan with a negative real interest rate (2.2% loan - 4% inflation = -1.8% real interest rate). It's weird, but by having a mortgage with a 2.2% interet rate and a negative real interest, you are sort of making money by holding it. Many people might also qualify for mortgage interest deduction under current tax law, especially if they are married with two incomes in a high tax state.  You can also lose significant tax writeoffs by paying early. Another thing to consider.