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My wife and I have a $1 million mortgage and $200,000 in cash — do we reduce our repayments or invest it?

MarketWatch logo MarketWatch 1/14/2018 Quentin Fottrell

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This is a recurring Q&A series of Marketwatch's Moneyologist, focusing on personal finance situations. The opinions are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

Dear Moneyist,

My wife and I are in our mid 30s and have been blessed enough to be relatively debt-free and purchase our first home together.

We were able to make a 20% down payment, but our remaining balance is still over $1 million. I decided to sell the town house I purchased years ago, and was able to come up with an additional $400,000. We decided to pay off all of our remaining debt — $25,000 for a car and $15,000 for a student loan — make some home improvements to our bathroom and install solar electricity. We also set aside a 6- to 12-month emergency fund.

We expect to be left with $200,000. The question is should we use that $200,000 to recast our mortgage — reduce the outstanding sum without altering the original terms — or invest the money? Our interest rate is low at 3.5% so I figured investing the bulk of it in an S&P 500 index fund should give us greater returns over 30 years. The current mortgage payment does stretch us a bit, but it’s manageable. Recasting would give us more monthly breathing room in our budget. 

We are also expecting a second child soon, and know that will have some unforeseen impact to our expenses as well.

First World Problems

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Dear First World,

It all depends on your appetite for risk (and reward).

On the one hand, $1 million is a lot to pay off, but you are both working and, given that you’re comfortable with that amount, you and your wife are obviously both in well-paid jobs, far more than the national average. You also clearly want this home to be the place where you will retire or, at least, spend many years there, given your investment in solar panels. Also, you’re smart to put aside a 12-month emergency fund. Nearly one-quarter of Americans don’t have one.

Your question received a spirited response in the Moneyist Facebook Group. Some members suggested buying a rental home, while others were uncomfortable with a 30-year mortgage and the $600,000-plus in interest payments. But you don’t have to invest all the $200,000 and can hold some money back in case you want to reduce your monthly payments, especially as you already feel stretched by your existing mortgage payments. Plus, you and your wife may decide to have another child and one of you may at some point decide to stay home. And many other people agreed that you should invest it. Most people commended you on your financial story so far.

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If I were to tell you what to do with this money, I too would bring my own history to my answer. So I asked Kerry Jackson, a certified financial planner at Fish and Associates in Memphis, Tenn. “When it comes to investing the $200,000 in an S&P index fund versus putting the money toward your mortgage balance, you’re right in estimating that your money could probably grow more in the market than your house is likely to appreciate in that same time period. For the past 20 years the S&P average return was over 10% versus the national housing market average which was considerably lower in most regions.” (Unless you were living in New York or San Francisco.)

If you decide to invest your $200,000 you could, of course, access the money if your cash flow gets tight, Jackson adds. “The only way to access the cash if you put it all toward the mortgage balance is to take out a line of credit. Recasting the mortgage can be a good solution as well if your cash flow needs are a greater concern to you than increasing your portfolio savings,” she says. But few people would turn up their nose at a 3.5% interest rate in 2018. Of the money you invest, you may wish to split it between stocks and bonds for added peace of mind.

There are few wrong answers. And many choices. Good luck!

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Hello there, MarketWatchers. Check out the Moneyist Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas: inheritance, wills, divorce, tipping, gifting. I often talk to lawyers, accountants, financial advisers and other experts, in addition to offering my own thoughts. I receive more letters than I could ever answer, so I’ll be bringing all of that guidance — including some you might not see in these columns — to this group. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.


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