Market or Principal
Okay so I am looking for opinions on what others would do with this situation. I will first describe the details and our situation. Then outline what I am thinking in terms of options I see. Either choose which option you would take or give other options if you have any.
-We are Baby Step 6
-Have Income Replacement (Emergency Fund became IR)
-Working on Emergency Fund (I broke off Emergency Fund from IR based off of what I have been reading here)
-We have other buffers already in place to help mitigate any need to lean on our Emergency Fund except for true Emergencies
So we have 124k left on the house. We have been wanting a new home for awhile so I started the "New Home Fund" (NFH) awhile back. At the end of 2019 we decided to make a 3yr budget plan to aggressively attack this goal. Goal is to look at a new home in 3yrs (2023ish) with whatever we have saved by that time. Each year we choose where we are going to invest: Market or towards principle. For year 2020 we chose market but had to stop once covid took off. In either case, funds still did very well. We are now at 110k. As of March(ish) of this year (2021) I show that we will move from short-term cap gains to long-term cap gains (aka older than 1yr). FYI: Some funds we have in that account do predate 2020 investments.
Also in Jan of 2021 (aka yesterday) I redid our IR game plan. I project that we can last 5 months but to do that we have chosen what ynab goals would "turn off" in order to become leaner and last longer. I tried to find a balance between comfortability (as to not impact the family too much) while still being good stewards of our resources and the situation we would be in. If the house was paid off, we could last another month or two longer.
With that said, I am wondering where we should invest funds this year and if I should wipe out the mortgage and then put funds back into NFH. And yes, with this climate, I do have a concern of job stability.
Invest into principle from now to April (when cap gains turn to long-term). At that point consider liquidating all funds and paying off mortgage. Then return to investing into the market again with all that we have. Not sure about taxes though lol.
Keep investing into the market and if I ever lost my job (and if the market was still up), consider liquidating long-term cap gain funds (if enough) and wipe out mortgage at that time.
Keep investing into the market and NOT liquidate if job loss. Just evaluate what to do when we cross that bridge. Options being: use towards lasting longer if needed, paying off house, etc.
Invest into principle this year and just see where market goes
I wouldn't pay down principal on a house I plan to sell soon. TBH, I wouldn't pay down principal on a house I was going to keep for the foreseeable future because my mortgage rate is so low. What is yours? You also can't get that money back if SHTF.
Whether to invest or not is tricky because of your short timeline. Are you OK postponing the move if the market turns down and you lose 20%?
Yeah, I don’t get the rush to pay down your mortgage principal. I’m someone who aggressively pays off any any loan, but I’ve never put an extra cent to mortgage. Over the years our money has done us much more benefit either being aggressively invested, saved for emergencies, or spent on necessities preventing new debt. We refinanced to a 15 yr in late 2019.
I understand times are scary right now. But if your goal is to buy a new house in 3 years, then keep your eye on that prize. Pay your current mortgage and put every other cent into taking care of your family, securing your emergency savings, and investing conservatively towards the new house goal.
Here's the mathematically correct answer:
1. If you are going to buy equities with that money, you'll come out ahead on a risk adjusted basis.
2. If you are going to buy bonds with that money, you're going to lose compared to the 4.125% rate.
3. If you are going to buy at your chosen asset allocation, just direct the money that would have purchased bonds to paying down the mortgage.
My suggestion would be as follows: Option 3 if you are only investing in stocks. If you are investing in stocks and bonds, I would do a split and send the bond money to the mortgage.
I would not liquidate in the case of a job loss. All that paying off the mortgage will do is eliminate the mortgage. You will still have all your other expenses. This investment portfolio essentially becomes part of your emergency fund of last resort. If you use it to pay off the house, your emergency fund is limited to the money in the bank.
Lastly, is there a reasons you didn't look into a refinance this year?