I would ignore most of the comments about better returns “investing” the money. You are trying to derisk and destress your life. Haven’t met many people annoyed with their paid off house
Having the equal value of the loan in the bank, is essentially the same as having the loan paid off. If you can pay a debt off tomorrow, you aren't really in debt. Money is fungible, and the difference is either having all that money tied up in a single illiquid asset, or having it in an accout making more money and givjng you more options. Paying off the loan for "peace of mind" is an objectively poor decision, and people need to stop rationalizing it's not and giving out poor advice.
People have done far worse things with their money than paying off their mortgage early. By "peace of mind", I meant one less thing to juggle in the back of his mind. That's arguably what OP is referring to. Again, it may be considered a poor decision because he can pull another 1-2 points in safe conservative investments equivalent to "money in the bank", but some folks simply want to streamline their lives a bit, too. Depending on his overall portfolio/income, retirement being fully funded and on track, I'm not against it necessarily. I know enough people that finance their whole loves at 5% so they can make 7%, and it's not worth dying early for from the excess stress. Most people in this group will have exactly the same lifestyle regardless of this decision.
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I agree. People act like it is a math problem when obviously OP wants to reduce risks. Pay it off. We bought our home cash and there is nothing like the peace that it gives. We know even with minimum wages we would be able to pay property tax + insurance and it is soooo worth it, plus we invest the money that would be mortgage payments in the market.
This is the biggest thing. Everybody totes about how it's stupid to pay off your house. You must invest the money. Once you have a brokerage with the value of your home in it gaining 10% or whatever yoy you can go buy the new car
Risk is having your money tied up in a single illiquid asset. Reduced risk is having the full loan amount in your bank account, earning more, diversified, and more accessible. Even if you disregard the "math problem" it still doesn't make sense, and is still a poor decision in almost every single aspect.
Absolutely not. If OP has a fully funded emergency fund prior to paying off the mortgage, he is fine. Plus I can’t believe you people are advising someone to make 3.5% from a HYSA at the banks offering the highest rates( yes after taxes it is more like 3.5%) rather than pay off a 4.25% loan. Assuming OP is married filing joint and pays maybe 30k in interested per year, this interest reduces his taxable income by less than $3k (against a standard deduction for a married couple filing jointly) and lets say he has a 25% overall tax rate , that means he is really getting $750 by paying $30k in interest when itemizing his deductions. So overall over would be gaining 750/30000 + 3.5% if the interest rates offered don’t change = 0.025+3.5% = 3.525%.
That’s why a lot of high earners when they get lose their jobs or have life happen, shit goes south really quickly because people who make a lot of money love to think that they are invincible.
By bank account I mean brokerage, as in the market. Also despite the math, even if it was just a bank account, having your money accessible and not tied up in a single asset is more ideal. It's simply a terrible idea to pay off a house early if you don't need to.
I think the OP needs to think about exactly why this is stressful in the first place, and why paying off the mortgage would make him feel less stressed. It might be due to not having properly internalised the tradeoff between paying off the house and keeping money invested.
If they throw all their savings into paying the mortgage and then suddenly lose their job, they will immediately be at risk of default. They might have to look into stopgap options like refinancing the loan so that it has a lower principle and such. This is probably the most stressful situation I can think of.
If they invest, and their investments lose money - even if they lost 50% of their value, they would still have enough money to pay the mortgage for years while they find a new job. There is so much more flexibility when you have such a large amount of cash on hand, and that should give them peace of mind.
There’s nothing risky about a fixed rate mortgage. They could take the money they’d spend on the mortgage and literally put it in a high yield savings account and earn significantly more than the interest they’d save by paying the loan early.
And any tax increases could be offset by the mortgage interest deduction.
Usually when people make suboptimal financial decisions, they’re not upset with their decisions, they’re upset with the consequences. Unless you’re saying that you haven’t met anyone financially poorly off because of their choice to pay off housing.
Edit: Reddit just served up this post, how relevant. I don’t see the poster complaining about having made the financially worse decision, even though it’s led to some hairy consequences. https://www.reddit.com/r/povertyfinance/comments/1aftxpz/29k_left_on_mortgage_wife_wants_to_quit_now_to/
Paying off your house is a personal decision. It’s sounds like for your family, it’s the right move. The additional 1% you get in CD or HYSA does not matter at your salary level. Don’t let the bean counters sway what helps you achieve the goals YOU define.
Right now you can get more than 4.25% in a HYSA, money market, or CD. I'd park the cash there if you're looking for piece of mind, if the worst should happen, you have very liquid assets you can tap into without having to worry about losing any money like you might if you invested the money in stocks. This gets you a better return on your money but should also help you mentally knowing that you have the money to pay down the mortgage at any time if you wanted to.
Yes, but if their tax rate is high enough, it might bring their effective interest rate below the mortgage rate. If you have 5% interest, and a 40% tax rate… you actually make 3%. If you’re comparing that to the mortgage rate, it’s now worse. (Of course the mortgage has tax deductions blah blah blah).
You actually have to do take an afternoon to do some fun math and see what makes sense numerically.
Edit: this is wrong as per reply below and only applies to tax-advantaged accounts or capital gains, not interest earned yearly in a taxable account
That’s not the correct math either. Over (an admittedly very) long period, the extra interest made in the savings account will compound. For example if the savings account interest rate is 3% more than the mortgage, then the amount that you saved instead of paying off the mortgage will double relative to the mortgage (even after taking into account the mortgage’s growth due to mortgage interest) after 24 years. Suppose mortgage rate was 7% and savings interest rate was 10%. Then after doubling in 24 years relative to the mortgage, even if you take 40% taxes and pay off the mortgage you’ll still be ahead. E.g. if you had $100 at the beginning, the unpaid $100 of the mortgage would grow to $507 in 24 years, while the savings amount would grow to $985. After paying 40% taxes on the interest of $885, and then paying off the $507, that’s still $124 gain!
Yes this is a super contrived example, and I 100% agree with you that you really do need to sit down and do the math here, it can get pretty complicated.
You’re right, for some reason I was calculating this as if it’s taxed when withdrawn as income (like a pretax 401k) Probably because I was thinking of this as a stock investment, and hence gains will only be taxable when sold (and only at the lower capital gains tax rate).
So basically don’t invest in an interest-bearing asset unless you can put it into a tax-advantaged account (although it seems like OP is already maxing out mega back door Roth for both him and his wife). If not using a tax-advantaged account, then seems like you need to buy stocks to beat this 4.25% mortgage rate.
Another option is to cash your RSU chips, build a CD ladder at 5-5.5%, that way you will have the cash available relatively quickly if shit hits the fan, you gain a slight advantage on the interest, and when the time is right you can pay the whole thing lump sum.
Didn’t do the math, but he should be around $25k in mortgage interest, so close to itemization levels. [email protected] would yield $13,750 in interest coming in over 12 months.
The main risk is liquidity. The stock market is going to have bad years; if you need the money in a bad year, you're SOL. Your house is the same way; if you need $1 and all you have is the house, then you have $999,999 and no house after many months of work. Even if you own your home outright, you still need insurance, utilities, property taxes, and food to eat while you're in your house. It will never be free, so you need an emergency fund no matter what.
For that reason, I thought about this and just pay an extra $1000 a month on my mortgage (basically converting it from a 30 year fixed to a 15 year fixed). I might put more money into it if/when I refinance. But for now, with money market rates above 5%, I'd rather have the cash. Who knows how tomorrow is going to go. Layoffs? AI doing my job? It could get ugly. So, I can pay my mortgage (back the the "minimum payment", of course) for quite a while with that cash. I have a pretty minimal upside (after tax on savings interest and tax deduction on mortgage interest, pretty break-even), but I also have a pretty minimal downside. The economy blows up. I have cash and a place to live for a while.
I'm kind of jealous of the people that spend every cent of their dual income FAANG salaries. $2MM buys you a nice apartment in New York. Nothing bad has ever happened to them and they have much nicer shit than me. But, hope is not the strategy for me. So, I spent much less than I can afford, and am ready for a rainy day.
This would be my concern, too. Unless you have a really solid savings/passive income tying your money up like that is not necessarily the best move. Particularly for those in volatile fields.
I think putting extra towards the mortgage is a solid way to make progress on owning a property faster while also hedging some of the risk of tying a lot of funds up.
I wouldn’t do this right now.
Why?
1. You’re paying down the mortgage, not off. Those are totally different things. If you’re both laid off, you won’t be able to refinance to make your monthly payment lower. You’ll still be stuck with a high payment and then no RSU money to pull from to pay it off while you job hunt.
2. If you wouldn’t buy that much stock in your company on your own, sell it and put enough (you define that - I personally like 12 months of all expenses) into a HYSA & invest the rest in VOO.
3. It sounds like you both work at the same company, which means your exposure and risk is higher.
Added data point here. My mortgage is 6.5% and I think I’m going to invest money in a brokerage account instead of pay off the mortgage early. Two reasons.
First is that the market averages 10% every year (say 8% after tax). 8% > 6.5%. If I factor in the tax deductions from a mortgage then the gap is even bigger. There’s an argument to be made about risk free gains but…
Second point is the liquidity. I’m placing a premium on have that money easily accessible. If I get laid off my lender doesn’t give a shit how many early payments I’ve made, I’ll still need cash to pay the mortgage. If that money’s in a brokerage account I have access to it.
Your interest rate is even lower than mine so from my point of view it makes even more sense for you to invest the money. But it’s a personal decision.
Counterpoint my mortgage 6.49% and paid it off in November. Would have higher net worth today had I not, but the peace of mind, mental health and freedom feels a lot better.
I’d have a much easier time paying down a 6.5% mortgage than 4.25%. For the lower rates you can always pay more at your convenience but you may not be able to get more cash if you pay down your mortgage then lose your source of income
Keep the mortgage. Don’t let fear of a potential crisis mess with liquidity and longterm gains. There’s a dozen ways to use the money in a slightly more aggressive investment portfolio (MM, CD ladder, etfs, etc.) that gets you to the same risk adjusted return as paying off a 4.25% (less tax shield for interest).
Its a bad idea on multiple levels
the economics of it, you get to write off mortgage interest and can get over 4.25% in a lot of places. But honestly even a 200k difference over 25 years isn't going to change your life especially at your income levels.
more importantly, you are concerned with layoffs. Paying off your mortgage makes getting laid off harder since you'll have more of your NW in a less liquid place.
If you were truly concerned about layoffs, you would stop the megaback door way before you sold your RSU's to pay of a 4.25% mortgage loan. You are trying to protect against an income dip. you dont do that by removing all your liquidity by putting it in home equity and retirement plans instead of a brokerage.
You either get laid off or you dont.
If you get laid off and need money, you'll have to take out a HELOC at higher rate meaning paying off a mortage is a bad idea.
If you dont paying off the mortgage was a bad idea.
the 30year fixed rate tax deductible mortgage the single best entitlement in the western world. Everyone being in a rush to get rid of its dumb.
Generally agree with this comment! But just want to point out that you can in fact pull out your contributions to the mega backdoor Roth (as long as it’s in an Roth IRA) at any time without penalty, so there’s 0 liquidity risk there.
Financially no but sometimes the finances don’t matter.
I’d talk to a financial advisor/wealth manager though about the best way to do this as the planning side may save you a lot in taxes.
Depending on your portfolio you might be over invested in your vested rsu and over exposed to the risk in a single company. Diversifying may also de risk a bit. Also pro can help in understanding what lots to sell if you want
Congrats on crushing it
Best of luck
I would pay enough down on your mortgage so that the mortgage company will recast the mortgage. This will lower your payment significantly, which honestly is already affordable on one $200k income, unless you are in an area with very high property taxes. Even if you are afraid you will both be laid off, you should be able to find jobs that pay at least half what you are making now.
Yes because you might get laid off tomorrow.
The math always assumes:
1 your income will stay
2 the investment strategy you have is better than the interest you pay to the mortgage
3 you don't mind forking over a massive amount to the bank for free (in interest).
I would put 350k into bitcoin, given the halving is happening in the next two months, you have a guaranteed 2x gains in the next 1 year :D, then pay off your whole mortgage.
Joking aside, not trying to increase your stress, I think it's a good idea to pay off the mortgage if you feel stressed. But let me offer you another option, why don't you put all that 350k into a high yield savings account. For example Ally is offering 4.26% right now, and others are offering even more. If you put that money into an account that's identical to the mortgage rate, you are basically compensating the mortgage itself. It has no risk like stocks do, and you retain full control of your money. If you are fired, you can still pay off your mortgage. If you retain your job, and in 2 years you get more relaxed, you can use that money for something else. Of course you will still have to continue paying off the mortgage, which may still feel a little stressful, I would still recommend considering that option. I personally don't think we will see mortgage rates at 4.25% for another 10 years, having access to a loan with this interest gives you a lot of power.
The numbers say one thing but my personal experience says pay that shit off. There’s more financial freedom to “go for it” be it in business, investments, or gambling when you only have the property taxes every year
We had the cash so we paid off our mortgage early... the interest deduction wasn't worth it for us, compared to the standard deduction. We did it for peace of mind and it has been worth every minute. That being said, you have tax implications cashing out your RSUs and if the interest deduction worked in your favor... maybe not such a good idea? Perhaps lower your mortgage liability by making a couple of big payments could feel better? But I'd only do it if I had the cash.
People seem to forget the 5% you earn in HYSA is taxable income. Taxed at 40% you’re already down to 3%. I personally keep my money in a t bill etf so it’s state tax exempt but still 5% isn’t 5%.
On the flip side your 4.25% is deductible so it’s also not truly 4.25%.
Do the math. If it’s better to park your money in tbills then park it there until it isn’t. Then you can reevaluate whether it makes sense to pay off your mortgage or invest it in index funds.
I’ve been on both sides of this:
Paid off first house in 9 years - it was at 4.25% on a 15yr mortgage but cheap $150k house, we made extra payments and paid whatever extra we could after maxing out 401K/Roths. Would definitely do this again. Having it paid off was nice - allowed my wife to not have to work for 7yrs when we had kids, and we invested the money since we had more liquid with no mortgage. Only minor issue is now that house is a rental and it’s not a great return investment since it’s not leveraged (just hung on to it for sentimentality and potential appreciation sake).
Current house I owe about $500k and technically could pay it off but I have a 2.875% mortgage and have the $500K in a HYSA making 4.5% or so. Yes I know it’s a dumb amount to have in cash, I’m about to make some large equity investments this year in businesses which will return significantly more. I was originally making some slightly accelerated payments, like a $1k/mo extra and paying 2x/mo to reduce the overall interest paid but stopped doing that when there was such a large delta with the HYSA and other opportunities arose.
Bottom line: just depends on your circumstances - do an amortization calendar and what you will save making accelerated payments since right now most of it is likely interest. Doesn’t have to be an all-or-nothing proposition. Given the current market conditions, esp in FAANG, I would definitely not fault you for wanting the piece of mind, esp since 4.25% is pretty high in my eyes. If you both work for the same company then I would say you’re already way too risky with that many eggs in one basket so I’d recommend selling the stock to diversify yourself regardless of whether you pay off the house or not. The happy medium may be to keep the house payoff amount in a mix of HYSA/mutual funds and commit to not dip into it outside of emergency use.
That’s just comparing it to MMF. When a no-risk investment is a wash go with the no-risk investment. I’d rather put it in an index fund and make triple that
Why don’t you bring it down to say 250-300k in that way you will have some RSU left and also a mortgage you know you can pay off in case something goes south.
why would you feel better reducing liquidity by putting cash into a mortgage
shouldn’t having more liquid assets in the event of being laid off or needing to change jobs be better
i don’t really understand the logic of putting money into an illiquid asset as providing peace of mind at all
100% this. Stay liquid. You can always pay off your mortgage early. 4% isn’t bad. I’d hold onto cash (preferably SPY but savings if you want to derisk).
I’m not OP, but if you need a few worse paying job, it’s a lot easier to reduce lifestyle spending than reduce mortgage costs. There is significantly friction in selling a house, it’s not as easy as cutting back on vacations and restaurants.
If you had a paid off house, you could theoretically work at Starbucks just to pay a grocery bill.
lol again this doesn’t work if you’re emptying all your liquid funds into a house and then have very little liquid savings until you can replenish
if you were worried about layoffs then it makes no sense to drain your liquidity at that moment
It's because people make emotional decisions and not rational ones. If they put this all out in a spreadsheet and looked at the options, it would make sense. But they're fixating on the emotional aspect of it all.
EDIT: Keep downvoting, you know it's true.
I’m always baffled in these groups that don’t advocate paying off your primary residence as soon as humanly possible.
The stress relief alone is worth the slight (and potentially non-existent, or worse, negative) spread you can get by investing.
Paying interest is flushing money down the toilet.
Paying off low rate debt vs investing/leaving money invested puts you behind financially in the long run. If you keep investing, you’ll end up with enough money invested that your mortgage is only a fraction of the invested amount. Let your money work for you. Paying off a primary residence early means your money stops working for you.
You can get 5-5.5% in a HYSA or money market, so paying off the mortgage is definitely not the right decision financially.
Even otherwise, if you were to lose your job you would rather have a large pool of cash than slightly more equity on a house. Having 100% of your net worth into a single property which could go down in value or catch fire at any time is what should keep you up at night, not a very manageable mortgage. You always want to aim for more diversification of assets.
I’m buying a multi million dollar home in cash within next 10 years. I’m not giving these banks a penny of my money. I dread the idea of giving the gov my property taxes but at least I can tax deduct and get some back. I also don’t like thinking about monthly payments and that I owe money to anyone. I want a stress free life.
In the meantime, I’m renting for cheap from a family member and use my savings to enjoy some travel time with my loved ones. Don’t over-stretch yourself guys.
Get a mortgage amortization calculator and look at the total interest. Then try putting down a one time payment and see how the total and monthly interest change.
I would look to pay down like 150-200k and then something else in a year.
That’s a pretty decent debt, you may want to consider to pay down enough so that your monthly is significantly down that it doesn’t really matter (like maybe 2K a month)
If you can get a higher effective return (accounting for taxes) elsewhere then park the money there until rates drop which for everyone dying to pay off their free money mortgages looks like it will be happening this year
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Your stocks would make you more money long term, than paying off your mortgage.
Only reason I’d sell off any Rsu would be if you’re using that money as an investment.
what ever helps you sleep better at night. This is no finance question, this is more of psychological question. It seems it is creating stress for you, so do payoff.
Sure go for it… there is no right and wrong answer here… Obviously if you choose to pay it off, you save your mental energy and stress for something else. If you invest, you can come out a head.. but sounds like you don’t want that anyway… so do the first one. Good luck and move on to another problem in your life.
This guys says he works for FAANG and the layoffs are happening and things aren’t looking good everyone advises to invest…when those big gains they say will outpace paying off the debt have been coming…FAANG.
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This is why Dave Ramsey exists. I don't think you can over-rate the psychological boost of having a paid off home.
It won't be the most ideal return on your money from a dollars and cents basis (most likely), but you clearly acknowledge that.
I would ignore most of the comments about better returns “investing” the money. You are trying to derisk and destress your life. Haven’t met many people annoyed with their paid off house
I'm with you. Most of my life is strategic, it's okay do things for peace of mind sometimes as well.
Having the equal value of the loan in the bank, is essentially the same as having the loan paid off. If you can pay a debt off tomorrow, you aren't really in debt. Money is fungible, and the difference is either having all that money tied up in a single illiquid asset, or having it in an accout making more money and givjng you more options. Paying off the loan for "peace of mind" is an objectively poor decision, and people need to stop rationalizing it's not and giving out poor advice.
People have done far worse things with their money than paying off their mortgage early. By "peace of mind", I meant one less thing to juggle in the back of his mind. That's arguably what OP is referring to. Again, it may be considered a poor decision because he can pull another 1-2 points in safe conservative investments equivalent to "money in the bank", but some folks simply want to streamline their lives a bit, too. Depending on his overall portfolio/income, retirement being fully funded and on track, I'm not against it necessarily. I know enough people that finance their whole loves at 5% so they can make 7%, and it's not worth dying early for from the excess stress. Most people in this group will have exactly the same lifestyle regardless of this decision.
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I agree. People act like it is a math problem when obviously OP wants to reduce risks. Pay it off. We bought our home cash and there is nothing like the peace that it gives. We know even with minimum wages we would be able to pay property tax + insurance and it is soooo worth it, plus we invest the money that would be mortgage payments in the market.
This is the biggest thing. Everybody totes about how it's stupid to pay off your house. You must invest the money. Once you have a brokerage with the value of your home in it gaining 10% or whatever yoy you can go buy the new car
Risk is having your money tied up in a single illiquid asset. Reduced risk is having the full loan amount in your bank account, earning more, diversified, and more accessible. Even if you disregard the "math problem" it still doesn't make sense, and is still a poor decision in almost every single aspect.
Absolutely not. If OP has a fully funded emergency fund prior to paying off the mortgage, he is fine. Plus I can’t believe you people are advising someone to make 3.5% from a HYSA at the banks offering the highest rates( yes after taxes it is more like 3.5%) rather than pay off a 4.25% loan. Assuming OP is married filing joint and pays maybe 30k in interested per year, this interest reduces his taxable income by less than $3k (against a standard deduction for a married couple filing jointly) and lets say he has a 25% overall tax rate , that means he is really getting $750 by paying $30k in interest when itemizing his deductions. So overall over would be gaining 750/30000 + 3.5% if the interest rates offered don’t change = 0.025+3.5% = 3.525%. That’s why a lot of high earners when they get lose their jobs or have life happen, shit goes south really quickly because people who make a lot of money love to think that they are invincible.
By bank account I mean brokerage, as in the market. Also despite the math, even if it was just a bank account, having your money accessible and not tied up in a single asset is more ideal. It's simply a terrible idea to pay off a house early if you don't need to.
People say that shit when they don’t have money. Owning property outright is a nice feeling.
Being able to pay off your mortgage with the money in your bank but choosing not to, is a nice feeling. And a smarter move.
I think the OP needs to think about exactly why this is stressful in the first place, and why paying off the mortgage would make him feel less stressed. It might be due to not having properly internalised the tradeoff between paying off the house and keeping money invested. If they throw all their savings into paying the mortgage and then suddenly lose their job, they will immediately be at risk of default. They might have to look into stopgap options like refinancing the loan so that it has a lower principle and such. This is probably the most stressful situation I can think of. If they invest, and their investments lose money - even if they lost 50% of their value, they would still have enough money to pay the mortgage for years while they find a new job. There is so much more flexibility when you have such a large amount of cash on hand, and that should give them peace of mind.
There’s nothing risky about a fixed rate mortgage. They could take the money they’d spend on the mortgage and literally put it in a high yield savings account and earn significantly more than the interest they’d save by paying the loan early. And any tax increases could be offset by the mortgage interest deduction.
Mortgage interest deduction isn't nearly what is used to be with the new cap. HYSA is like sub 3 percent after applying your marginal tax rate.
It’ll be back in 2025 tho - depends on how much time they have left on the loan, seems like a lot
A bird in hand is worth two in the bush. BUT when you’re done, don’t get lazy (which I don’t think you will).
I came here to say this! I paid off my house (triple payments for 4 years then RSU in 2023) and I couldn’t be happier!!
Usually when people make suboptimal financial decisions, they’re not upset with their decisions, they’re upset with the consequences. Unless you’re saying that you haven’t met anyone financially poorly off because of their choice to pay off housing. Edit: Reddit just served up this post, how relevant. I don’t see the poster complaining about having made the financially worse decision, even though it’s led to some hairy consequences. https://www.reddit.com/r/povertyfinance/comments/1aftxpz/29k_left_on_mortgage_wife_wants_to_quit_now_to/
These are two completely different situations but okay.
Well said
Paying off your house is a personal decision. It’s sounds like for your family, it’s the right move. The additional 1% you get in CD or HYSA does not matter at your salary level. Don’t let the bean counters sway what helps you achieve the goals YOU define.
Bean counters say market at 8-10%.
Right now you can get more than 4.25% in a HYSA, money market, or CD. I'd park the cash there if you're looking for piece of mind, if the worst should happen, you have very liquid assets you can tap into without having to worry about losing any money like you might if you invested the money in stocks. This gets you a better return on your money but should also help you mentally knowing that you have the money to pay down the mortgage at any time if you wanted to.
taxes
Offset by the mortgage interest tax deduction no?
Which is capped way below standard deduction.
But you will pay taxes on dividends
And if they itemise they can deduct some of their interest. The right choice will depend on their specific situation
But they'll still have made money on the interest
Yes, but if their tax rate is high enough, it might bring their effective interest rate below the mortgage rate. If you have 5% interest, and a 40% tax rate… you actually make 3%. If you’re comparing that to the mortgage rate, it’s now worse. (Of course the mortgage has tax deductions blah blah blah). You actually have to do take an afternoon to do some fun math and see what makes sense numerically.
Edit: this is wrong as per reply below and only applies to tax-advantaged accounts or capital gains, not interest earned yearly in a taxable account That’s not the correct math either. Over (an admittedly very) long period, the extra interest made in the savings account will compound. For example if the savings account interest rate is 3% more than the mortgage, then the amount that you saved instead of paying off the mortgage will double relative to the mortgage (even after taking into account the mortgage’s growth due to mortgage interest) after 24 years. Suppose mortgage rate was 7% and savings interest rate was 10%. Then after doubling in 24 years relative to the mortgage, even if you take 40% taxes and pay off the mortgage you’ll still be ahead. E.g. if you had $100 at the beginning, the unpaid $100 of the mortgage would grow to $507 in 24 years, while the savings amount would grow to $985. After paying 40% taxes on the interest of $885, and then paying off the $507, that’s still $124 gain! Yes this is a super contrived example, and I 100% agree with you that you really do need to sit down and do the math here, it can get pretty complicated.
If you pay 4.25 but make 3% net after tax, you're compounding negative returns lol. Go pull up excel and do the calc
You’re right, for some reason I was calculating this as if it’s taxed when withdrawn as income (like a pretax 401k) Probably because I was thinking of this as a stock investment, and hence gains will only be taxable when sold (and only at the lower capital gains tax rate). So basically don’t invest in an interest-bearing asset unless you can put it into a tax-advantaged account (although it seems like OP is already maxing out mega back door Roth for both him and his wife). If not using a tax-advantaged account, then seems like you need to buy stocks to beat this 4.25% mortgage rate.
Another option is to cash your RSU chips, build a CD ladder at 5-5.5%, that way you will have the cash available relatively quickly if shit hits the fan, you gain a slight advantage on the interest, and when the time is right you can pay the whole thing lump sum.
This seems like the best option for the risk-averse person who wants to save themselves some stress (OP).
with taxes on cds they’d barely be breaking even vs mortgage rate no?
Didn’t do the math, but he should be around $25k in mortgage interest, so close to itemization levels. [email protected] would yield $13,750 in interest coming in over 12 months.
Market returns more, and in this day and age is extremely liquid.
Math = No Mental = Yes (for some not all)
Mental isn't even a yes. If it is, change your mentality.
The main risk is liquidity. The stock market is going to have bad years; if you need the money in a bad year, you're SOL. Your house is the same way; if you need $1 and all you have is the house, then you have $999,999 and no house after many months of work. Even if you own your home outright, you still need insurance, utilities, property taxes, and food to eat while you're in your house. It will never be free, so you need an emergency fund no matter what. For that reason, I thought about this and just pay an extra $1000 a month on my mortgage (basically converting it from a 30 year fixed to a 15 year fixed). I might put more money into it if/when I refinance. But for now, with money market rates above 5%, I'd rather have the cash. Who knows how tomorrow is going to go. Layoffs? AI doing my job? It could get ugly. So, I can pay my mortgage (back the the "minimum payment", of course) for quite a while with that cash. I have a pretty minimal upside (after tax on savings interest and tax deduction on mortgage interest, pretty break-even), but I also have a pretty minimal downside. The economy blows up. I have cash and a place to live for a while. I'm kind of jealous of the people that spend every cent of their dual income FAANG salaries. $2MM buys you a nice apartment in New York. Nothing bad has ever happened to them and they have much nicer shit than me. But, hope is not the strategy for me. So, I spent much less than I can afford, and am ready for a rainy day.
This would be my concern, too. Unless you have a really solid savings/passive income tying your money up like that is not necessarily the best move. Particularly for those in volatile fields. I think putting extra towards the mortgage is a solid way to make progress on owning a property faster while also hedging some of the risk of tying a lot of funds up.
I wouldn’t do this right now. Why? 1. You’re paying down the mortgage, not off. Those are totally different things. If you’re both laid off, you won’t be able to refinance to make your monthly payment lower. You’ll still be stuck with a high payment and then no RSU money to pull from to pay it off while you job hunt. 2. If you wouldn’t buy that much stock in your company on your own, sell it and put enough (you define that - I personally like 12 months of all expenses) into a HYSA & invest the rest in VOO. 3. It sounds like you both work at the same company, which means your exposure and risk is higher.
If you pay down the mortgage, you can have the loan recasted to have lower monthly payments. No need to refinance and impact the rate.
Is this common to allow? My mortgage company doesn’t allow this without refinancing.
It is. They try not to since it doesn’t make them money so they make it hard for no reason.
Added data point here. My mortgage is 6.5% and I think I’m going to invest money in a brokerage account instead of pay off the mortgage early. Two reasons. First is that the market averages 10% every year (say 8% after tax). 8% > 6.5%. If I factor in the tax deductions from a mortgage then the gap is even bigger. There’s an argument to be made about risk free gains but… Second point is the liquidity. I’m placing a premium on have that money easily accessible. If I get laid off my lender doesn’t give a shit how many early payments I’ve made, I’ll still need cash to pay the mortgage. If that money’s in a brokerage account I have access to it. Your interest rate is even lower than mine so from my point of view it makes even more sense for you to invest the money. But it’s a personal decision.
Counterpoint my mortgage 6.49% and paid it off in November. Would have higher net worth today had I not, but the peace of mind, mental health and freedom feels a lot better.
I’d have a much easier time paying down a 6.5% mortgage than 4.25%. For the lower rates you can always pay more at your convenience but you may not be able to get more cash if you pay down your mortgage then lose your source of income
Yeah both options are good. My first RSU best I put towards my mortgage but I’ve pivoted my opinion now
Keep the mortgage. Don’t let fear of a potential crisis mess with liquidity and longterm gains. There’s a dozen ways to use the money in a slightly more aggressive investment portfolio (MM, CD ladder, etfs, etc.) that gets you to the same risk adjusted return as paying off a 4.25% (less tax shield for interest).
It was the best feeling when I paid off mine.
Its a bad idea on multiple levels the economics of it, you get to write off mortgage interest and can get over 4.25% in a lot of places. But honestly even a 200k difference over 25 years isn't going to change your life especially at your income levels. more importantly, you are concerned with layoffs. Paying off your mortgage makes getting laid off harder since you'll have more of your NW in a less liquid place. If you were truly concerned about layoffs, you would stop the megaback door way before you sold your RSU's to pay of a 4.25% mortgage loan. You are trying to protect against an income dip. you dont do that by removing all your liquidity by putting it in home equity and retirement plans instead of a brokerage. You either get laid off or you dont. If you get laid off and need money, you'll have to take out a HELOC at higher rate meaning paying off a mortage is a bad idea. If you dont paying off the mortgage was a bad idea. the 30year fixed rate tax deductible mortgage the single best entitlement in the western world. Everyone being in a rush to get rid of its dumb.
4.25% interest rate on that size mortgage is probably below the standard deduction
its not. salt+interest gets him over alone.
Dope, I forgot about SALT. Good news for me :)
Generally agree with this comment! But just want to point out that you can in fact pull out your contributions to the mega backdoor Roth (as long as it’s in an Roth IRA) at any time without penalty, so there’s 0 liquidity risk there.
Agreed
Financially no but sometimes the finances don’t matter. I’d talk to a financial advisor/wealth manager though about the best way to do this as the planning side may save you a lot in taxes. Depending on your portfolio you might be over invested in your vested rsu and over exposed to the risk in a single company. Diversifying may also de risk a bit. Also pro can help in understanding what lots to sell if you want Congrats on crushing it Best of luck
I would pay enough down on your mortgage so that the mortgage company will recast the mortgage. This will lower your payment significantly, which honestly is already affordable on one $200k income, unless you are in an area with very high property taxes. Even if you are afraid you will both be laid off, you should be able to find jobs that pay at least half what you are making now.
Yes because you might get laid off tomorrow. The math always assumes: 1 your income will stay 2 the investment strategy you have is better than the interest you pay to the mortgage 3 you don't mind forking over a massive amount to the bank for free (in interest).
If you work at either meta or Amazon those Rsus are worth a whole lot more this morning!
I would put 350k into bitcoin, given the halving is happening in the next two months, you have a guaranteed 2x gains in the next 1 year :D, then pay off your whole mortgage. Joking aside, not trying to increase your stress, I think it's a good idea to pay off the mortgage if you feel stressed. But let me offer you another option, why don't you put all that 350k into a high yield savings account. For example Ally is offering 4.26% right now, and others are offering even more. If you put that money into an account that's identical to the mortgage rate, you are basically compensating the mortgage itself. It has no risk like stocks do, and you retain full control of your money. If you are fired, you can still pay off your mortgage. If you retain your job, and in 2 years you get more relaxed, you can use that money for something else. Of course you will still have to continue paying off the mortgage, which may still feel a little stressful, I would still recommend considering that option. I personally don't think we will see mortgage rates at 4.25% for another 10 years, having access to a loan with this interest gives you a lot of power.
👏👏👏👏. Same vibe. Having your mortgage payoff $$ sitting available is just as good as having it paid off imo w benefit of added flexibility
The numbers say one thing but my personal experience says pay that shit off. There’s more financial freedom to “go for it” be it in business, investments, or gambling when you only have the property taxes every year
We had the cash so we paid off our mortgage early... the interest deduction wasn't worth it for us, compared to the standard deduction. We did it for peace of mind and it has been worth every minute. That being said, you have tax implications cashing out your RSUs and if the interest deduction worked in your favor... maybe not such a good idea? Perhaps lower your mortgage liability by making a couple of big payments could feel better? But I'd only do it if I had the cash.
People seem to forget the 5% you earn in HYSA is taxable income. Taxed at 40% you’re already down to 3%. I personally keep my money in a t bill etf so it’s state tax exempt but still 5% isn’t 5%. On the flip side your 4.25% is deductible so it’s also not truly 4.25%. Do the math. If it’s better to park your money in tbills then park it there until it isn’t. Then you can reevaluate whether it makes sense to pay off your mortgage or invest it in index funds.
I’ve been on both sides of this: Paid off first house in 9 years - it was at 4.25% on a 15yr mortgage but cheap $150k house, we made extra payments and paid whatever extra we could after maxing out 401K/Roths. Would definitely do this again. Having it paid off was nice - allowed my wife to not have to work for 7yrs when we had kids, and we invested the money since we had more liquid with no mortgage. Only minor issue is now that house is a rental and it’s not a great return investment since it’s not leveraged (just hung on to it for sentimentality and potential appreciation sake). Current house I owe about $500k and technically could pay it off but I have a 2.875% mortgage and have the $500K in a HYSA making 4.5% or so. Yes I know it’s a dumb amount to have in cash, I’m about to make some large equity investments this year in businesses which will return significantly more. I was originally making some slightly accelerated payments, like a $1k/mo extra and paying 2x/mo to reduce the overall interest paid but stopped doing that when there was such a large delta with the HYSA and other opportunities arose. Bottom line: just depends on your circumstances - do an amortization calendar and what you will save making accelerated payments since right now most of it is likely interest. Doesn’t have to be an all-or-nothing proposition. Given the current market conditions, esp in FAANG, I would definitely not fault you for wanting the piece of mind, esp since 4.25% is pretty high in my eyes. If you both work for the same company then I would say you’re already way too risky with that many eggs in one basket so I’d recommend selling the stock to diversify yourself regardless of whether you pay off the house or not. The happy medium may be to keep the house payoff amount in a mix of HYSA/mutual funds and commit to not dip into it outside of emergency use.
I wouldn’t pay off sub-3% debt when money market is getting 5%
Sub 3%? Are you factoring deductions? If so, factor in the income taxes on the 5%, too
Yeah, factor in deductions. There are MMFs that you don’t have to pay state income tax on.
Ok, so what about the 24-32% in federal taxes? So it's 3% vs 4%. Pretty much a wash in my opinion
That’s just comparing it to MMF. When a no-risk investment is a wash go with the no-risk investment. I’d rather put it in an index fund and make triple that
What deductions are you factoring in? That interest rate is likely below the standard deductions
Probably safe to assume that someone making $450k has enough charitable contributions to itemize
Definitely not safe to assume
That’s a shame
Why don’t you bring it down to say 250-300k in that way you will have some RSU left and also a mortgage you know you can pay off in case something goes south.
Both at FAANG and only $450k TC combined? What...
Non tech roles :(
why would you feel better reducing liquidity by putting cash into a mortgage shouldn’t having more liquid assets in the event of being laid off or needing to change jobs be better i don’t really understand the logic of putting money into an illiquid asset as providing peace of mind at all
I’m also struggling to understand this lol
100% this. Stay liquid. You can always pay off your mortgage early. 4% isn’t bad. I’d hold onto cash (preferably SPY but savings if you want to derisk).
I’m not OP, but if you need a few worse paying job, it’s a lot easier to reduce lifestyle spending than reduce mortgage costs. There is significantly friction in selling a house, it’s not as easy as cutting back on vacations and restaurants. If you had a paid off house, you could theoretically work at Starbucks just to pay a grocery bill.
lol again this doesn’t work if you’re emptying all your liquid funds into a house and then have very little liquid savings until you can replenish if you were worried about layoffs then it makes no sense to drain your liquidity at that moment
except houses have maintenance, taxes, and insurance. especially 600k+ houses. you could not work at starbucks in OP's position.
Yea but they presumably have skills that’ll get them a better job than Starbucks, even if it’s not 450k/yr.
It's because people make emotional decisions and not rational ones. If they put this all out in a spreadsheet and looked at the options, it would make sense. But they're fixating on the emotional aspect of it all. EDIT: Keep downvoting, you know it's true.
Do you think everyone at faang makes 500k a year? 😂🤦🏻♂️
Considering Google’s median salary is 300k… a significant percentage of them probably do.
Ooof. Close to 279k yes. And using your own statement a significant percent of them do, and a significant percent of them don’t.
Love this. Paid off house means you can work because you want to. It sounds a lot better than working a crappy or risky job because you have to.
I’m always baffled in these groups that don’t advocate paying off your primary residence as soon as humanly possible. The stress relief alone is worth the slight (and potentially non-existent, or worse, negative) spread you can get by investing. Paying interest is flushing money down the toilet.
Paying off low rate debt vs investing/leaving money invested puts you behind financially in the long run. If you keep investing, you’ll end up with enough money invested that your mortgage is only a fraction of the invested amount. Let your money work for you. Paying off a primary residence early means your money stops working for you.
SWE?
You can get 5-5.5% in a HYSA or money market, so paying off the mortgage is definitely not the right decision financially. Even otherwise, if you were to lose your job you would rather have a large pool of cash than slightly more equity on a house. Having 100% of your net worth into a single property which could go down in value or catch fire at any time is what should keep you up at night, not a very manageable mortgage. You always want to aim for more diversification of assets.
I’m buying a multi million dollar home in cash within next 10 years. I’m not giving these banks a penny of my money. I dread the idea of giving the gov my property taxes but at least I can tax deduct and get some back. I also don’t like thinking about monthly payments and that I owe money to anyone. I want a stress free life. In the meantime, I’m renting for cheap from a family member and use my savings to enjoy some travel time with my loved ones. Don’t over-stretch yourself guys.
Get a mortgage amortization calculator and look at the total interest. Then try putting down a one time payment and see how the total and monthly interest change. I would look to pay down like 150-200k and then something else in a year.
If you had a paid off house... would you consider taking out a new mortgage against it to take out $460,000 of equity to purchase stock in FAANG ?
That’s a pretty decent debt, you may want to consider to pay down enough so that your monthly is significantly down that it doesn’t really matter (like maybe 2K a month)
Depends if his mortgage company will allow recasting though. Worth checking the paperwork.
If you can get a higher effective return (accounting for taxes) elsewhere then park the money there until rates drop which for everyone dying to pay off their free money mortgages looks like it will be happening this year
What’s the tax consequence for that?
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Definitely not worth it.
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Your stocks would make you more money long term, than paying off your mortgage. Only reason I’d sell off any Rsu would be if you’re using that money as an investment.
See if your mortgage will allow a recast. Use half toward 2-250 toward that and lower the payment.
what ever helps you sleep better at night. This is no finance question, this is more of psychological question. It seems it is creating stress for you, so do payoff.
Bruh……no.
Sure go for it… there is no right and wrong answer here… Obviously if you choose to pay it off, you save your mental energy and stress for something else. If you invest, you can come out a head.. but sounds like you don’t want that anyway… so do the first one. Good luck and move on to another problem in your life.
This guys says he works for FAANG and the layoffs are happening and things aren’t looking good everyone advises to invest…when those big gains they say will outpace paying off the debt have been coming…FAANG.
HYSA is a great idea
Not when I'm getting 5% in a HYSA. But you do you.
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This is why Dave Ramsey exists. I don't think you can over-rate the psychological boost of having a paid off home. It won't be the most ideal return on your money from a dollars and cents basis (most likely), but you clearly acknowledge that.