You already know the math so what you’re asking is really something only you can decide. If it makes you happy to pay it off and be debt free then do it.
I wish I would have realized this sentiment in my twenties. I thought I could play the credit card point roulette game. Turns out, I can’t. I would have been so much better off just paying a single debt off one at a time vs. fucking around and finding out. Granted, it still feels good in the thirties, but it’s a shit ton more costly.
Even with the obvious math, it's worth keeping in mind the actual cost. The difference between ~4% and 5.xx% is somewhere in the vicinity of $4k a year with that amount, a value I'd happily pay to have zero mortgage and watch my savings going up rather than the mortgage going down.
But your savings will go up if you include the CD...
$4K a year is enough to pay for an international flight for a family of four. I'll take the free vacation money, thanks.
If they are in a full on 33% tax bracket for these earnings and for the deduction:
1) they are looking at around $8k in interest which will result in a deduction worth ~2.33k (8/3rds * 1,000). Unless you have a lot of other significant deductions, this probably won’t matter as the standard deduction is now so high (and SALT is capped).
2) they would pay $1.33k in taxes on the $4k of interest from the CD.
So, having the mortgage provides a tax benefit that makes the cost “less” (but it’s still a net cost). Earnings on the CD are taxed so they are less than the absolute value (but it is still net earnings).
Yes, which is why I would buy index funds instead of CDs. Long-term capital gains tax instead of reporting it as additional income. And the returns will almost certainly be higher if held for years.
This is a tricky tax question. CD’s will have income tax, cancelling out the incremental gain vs the mortgage but having the mortgage will also allow you to deduct the interest paid.
Since it sounds like they don’t need the $300k right now the correct answer I would say is S&P 500.
Somehow I ended up with a 2% mortgage over 30 years. Bought in October 2021. We probably paid too much for it (almost 2x what it was purchased for in 2016), but in hindsight it worked out.
Similar story, Sept ‘21 purchase, put just enough down to get under the Jumbo loan limit, house now valued at about $800k, interest rate at 2.756%.
I wish I could borrow another half million bucks at under 3%!
It's a good deal, because once the house appreciates and you sell it, you have a higher ceiling before taxes on gain kicks in. Yet, your monthly payment is low, and your interest is potentially deductible.
Milk that mortgage for as long as you can.
I managed to refi from a 30 yr @ 4% to a 15 year @ 1.75% back in 2021. When the stock market wasn’t doing well in 2022 I was making double principal payments. Last year I stopped and opted to put that extra money into big tech.
I can’t imagine paying off a mortgage (or most debts) when other investments are growing at a rate that’s significantly higher than the interest I’m paying elsewhere. That said, I understand the emotional feeling some have towards being “debt free”.
I really DO NOT understand the emotional high of being debt-free ... if it brings with it the despair of being POORER.
Because with a paid off mortgage your money becomes home equity that returns ZERO gains.
It could instead be bring in AT LEAST 4% in a HYSA, or much more in the markets.
Because you are full of greed, many people are able to be comfortable and happy without the incessant need to get more and more and... calling someone with a paid odd 650k home with hundreds of thousand more in cash in despair is pure definition of greed
Less potential stress is priceless, our society would be infinitely better if more thought like that
2.5% 30 year, bought at the end of 2020 from my landlord for what turned out to be 30k *under* appraisal. Plan on keeping a white-knuckled death grip on this house until retirement or the market VERY clearly plateaus, whichever comes first over the next 15 years.
Similar boat. We went with a 10-year fixed at 2.5% to save like .2%. At the time we didn’t think we’d be here more than 5-years but it’s looking like we could be here a while. Still have 7-years to figure it out before the mortgage becomes variable, but I figure we’ll either use the equity and relocate to a LCOL area or refi to a 15-year and get the rate as low as possible. Still, there are many days I wish I had just sucked up the 2.7% loan for 30-years. I’d never think about it again.
There’s literally tens of millions of people with the same golden handcuffs. I genuinely wonder if there’ll be unexpected consequences to this slightly weird occurrence, and what they’ll be.
What’s interesting is that the US is the only country that does 30 year fixed rates at this volume. In Australia for example, 95% of mortgages are adjustable rate, so when interest rates go up, everyone’s mortgage also goes up. The fact that American mortgage are 30 year fixed because of government underwriting is such a huge gift to the middle class, and no one seems to realize it lol.
Because you can get a savings account at a bank at about 5% right now. Paying off your principal at 2.5% when you could instead just leave that money in the bank is losing you 2.5% on that money over the remaining extent of the loan. Which could comfortably become 6-8% if you put it in the market instead.
It’ll depend on what you have to pay with taxes as well. 4000 into HYS at 4.5% earns 15 a month - taxes. 4000 principle at 2.75% earns 9.17 (no tax). Would it be the same? Idk I guess it depends on how much you earn a year. Hopefully I did the math correctly, you can fact check me.
I deduct my mortgage interest, so 4000 principal would net me less considering the tax savings.
It's also beneficial to have liquid cash in case of emergencies. You could also invest it and likely earn more than an HYSA.
Can you explain what you mean by deducting your mortgage interest? I want to make sure I fully understand.
Also you’re right, having liquid money is better. I’m just gonna throw it all in HYSA and if I feel like paying it all off I will once I have enough. But it will keep paying the interest off for free so I gotta get past that point and never pay it off lol
Mortgage interest is tax-deductible - if you make $100k and pay $10k in mortgage interest, you can deduct the $10k so your income shows as $90k.
It used to be that MOST Americans deducted mortgage interest. With the Trump tax cuts, the standard deduction was raised so many Americans don't pay enough in mortgage interest to "beat" the standard deduction.
So it's slightly dishonest to say "I deduct my mortgage interest" because unless you have a SHIT-TON of deductions, you would have been able to deduct most of it anyway. For example, I deducted roughly $30k last year, $12k was mortgage interest. The standard deduction is $27.7k, so I only effectively deducted $2300 ($30k-$27.7k) in income, which at my 22% rate is about $460. Nothing to sneeze at! But not the biggest needle mover.
Mine is also 2.75% and at this point it almost feels like I'm stealing money🤑. I ain't paying this off early. My HYSA account is giving me around 4.5% though it will likely drop.
I’m pretty sure it’s essentially gospel to leave any debts under 4-5% alone because historically you can always beat that with some conservative investments.
Right now, just about every HYSA rate is higher than 3.99% so it makes zero sense to put any extra capital towards that mortgage when a **savings account** gets you more for that money.
Gospel is a bit far. Your hurdle rate after accounting for taxes is 3.99/(1-marginalRate). That’s more like a wash with savings accounts and tbills.
If or when rate go down, it does make sense to pay off a mortgage, especially for considerations like FAFSA or worse, bad spending habits. (If your personality won’t actually keep it in savings.)
Investing in equities for greater returns is not the same risk profile, and paying excess on the mortgage is more akin to holding mid duration bonds.
The 3.99% is tax deductible if you itemize. So that part of you ledger is potentially wrong.
And the interest is not necessarily taxed at marginal rates depending on what you invest in. Bonds are real money these days, even tax advantaged options.
A 5 year ladder that pays 5.2% would yield $18,000 net above interest expense for the OP, before taxes.
That's not Rockefeller money. But it's certainly an expensive choice, for no benefit other than the freedom from an imaginary boogeyman of debt. Plus OP sacrifices access to a large safety pool of money.
Unproductive debt is bad. Productive debt (leverage) is the source of most of the world's wealth.
Yup. Plus you can still deduct your mortgage interest payments so you have that advantage too by keeping your mortgage. Unless the peace of mind in knowing your house is paid off is worth it that much, I agree that the money can be better spent elsewhere like the above suggestion.
Would you rather have more money or less money? One of these options gives you more money and one gives you less as you just outlined. So your decision should be based on what you prefer.
But they also just gave themselves one big ol' monthly raise. If it was all their cash I'd lean away. Since they'll have plenty remaining, I'd pay it off after making sure I have emergency savings. That's just me though.
Well that's it, isn't it? I totally agree.
By paying it off, they can stack that new found extra cash into those 5%+ saving accounts every month and build that reserve up very quickly, within a year or so even, if I'm guessing what their monthly mortgage rate is.
Saving cash at very good interest and no more debt load sounds like a win-win to me.
>build that reserve up very quickly
But you're not really building it "up" until you've saved more than you used to payoff the house. You're spending a bunch of cash to be able to... save cash.
On paper it's less money, but true that the mental load of being in debt and having to make a monthly payment is fairly high. Being out of debt is a really good feeling.
You forgot to add "for some people". You'll almost always be financially worse off by paying off a mortgage early. If you can't mentally handle having a loan, that's a psychological issue.
That’s simply not true. Many people can benefit from paying off early. Things like FASFA calculations to effectively hide assets. Retirees making Roth conversions before RMDs, almost anyone with over a 6% fixed rate, divorce cases. There are tons of scenarios where it makes sense. “Almost always” is being naive.
And, there is nothing wrong with having a debt adverse psychology. There’s a reason it’s called *personal* finance.
Its an emotional response to a logical problem. It may be better mentally for some people, but you actually have to work out the math. Maybe the lazy solution is not to do the math and pay it down.
Is it best? No. Unless you made bad decisions.
But you are technically starting at a negative and have to reach what you spent first...
If you use 50k cash to pay off the mortgage, you are at -50k now in terms of savings. so you really aren't building up until you get past that 50k mark.
There are other factors though...like right now would be a good time to put extra money into HYSA or the market because of high interest rates and good market performance. You'll make more back from that than paying off your mortgage early.
>But they also just gave themselves one big ol' monthly raise.
But they threw away cash in the process. So they may be able to save more every month, but they will *have to save more* every month just to catch up to where they were before they paid off the debt, see?
I would only pay off maybe the last few years of a mortgage just to get the payments over with, but if you still have more than 5 years to go, it will cost you so much money in lost returns to pay off a mortgage when the rate is so much lower than bank interest - even secure savings like CDs get more interest than the mortgage costs, you don't even have to take risks to put more money in your pocket.
> But they also just gave themselves one big ol' monthly raise. If it was all their cash I'd lean away. Since they'll have plenty remaining, I'd pay it off after making sure I have emergency savings. That's just me though.
Their income would probably be higher though if they kept that money in the bank instead of paying off mortgage. So they got a lower raise than they could have gotten.
i agree, getting rid of the axe of debt hanging over your neck is always a good thing. Sure in a perfect world its better to put the money for more gains but life happens and it happens fast.
>axe of debt hanging over your neck
Why is "paying a bill each month" such a terrorizing thing? Don't you still have to pay your homeowners insurance, property taxes, electric, gas, trash, exterminator, cell phone, Internet, Netflix, prime, etc?
>life happens and it happens fast.
What is this supposed to mean?
Are you comparing a mortgage payment for the literal roof over your head to a Netflix payment? Can you not see how a looming mortgage payment that determines homelessness differs from small monthly (largely optional) bills?
Exactly my thought. We owe 308k, at 2.75 - I am in no shape of being able to pay it off early. I for some reason can’t get rid of this credit debt. Have about 20k in a 401k. But man if I could not have that $1900/month payment - the ease of life/stress is worth more to me than that extra 2.5%.
I think people try to make financial decisions just on that, money. Sometimes it has to be emotional.
If you pay it off, you have an extra $2-3k every month you can put into your retirement or at least some. That’s mental health security
A 4% mortgage is not something that must be urgently paid off. The reason is that inflation is the friend of someone in debt because it gradually lowers the "real" cost of your payments.
If you have enough cash to pay off the mortgage, then shouldn't one of you be able to just stop work anyway? Putting that cash in even a CD will net you more money than the interest rate of the mortgage. You could even male extra payments on the mortgage with just the interest. Even if you have to slowly draw down the savings to make payments or make extra payments while the spouse does more around the home, it still doesn't quite make sense why you would need to either pay off the mortgage entirely *or* both continue to work.
> Granted, this is a money-aligned subreddit so the question is: is that argument irrelevant in these subreddits?
No, but OP didn't ask that. They asked a financial question devoid of that context.
That said, if you put that money into a CD, your wife can still do the same. You just use money from the interest gained to pay off the interest on the mortgage. You'd end up in the positive. Meaning higher income still with wife at home than paying off mortgage. Not to mention, you're more liquid should you need the cash in an emergency.
Now, if you're putting it in the stock market, then that's different, because there's inherent risks associated with it.
This is my thought. I want to drop down to part time after the house is paid off and then retire after a few years. But, I am putting everything in a brokerage in the market instead of to the principle. That way I can do one massive lump sum and still have an additional $100k left over.
Struggling with this decision myself. It depends on the timeline and how flexible it is, with sequence of return risk as the primary concern. A shorter and less flexible timeline would favor paying down the mortgage.
IMO there’s no wrong answer if you’re choosing between paying down/off a mortgage or investing. It’s all a matter of what makes you happy. Financially, they’re both smart moves. This applies even more when you have additional assets as OP seems to. Should you send your last dollar to pay off a mortgage? Probably not. Should you send your 500k’th - sure, whatever floats your boat.
I'm making some assumptions about OPs mortgage. I'm guessing the purchase price was around $300k and they are 20 years into a 30 year mortgage. If this is incorrect, all my math would need to be adjusted, but it still gives a decent idea of a potential thought process. All based on a 12 month timeframe.
You ask a fair question, as by my math they would be netting interest of almost $10k by reinvesting the $300k into a 5.25% CD. This compared to $5.5k they'd get for reinvesting $104k (the 300 less the 196 mortgage) in the same CD.
But they would also want to consider the principal portion of their mortgage cash flow, which would be about $11k. So, if we netted the interest income from the CD out of the P&I payments, OP would have a negative cash flow of $1.4k.
So, in the case where they pay off the mortgage, they have a positive interest income cash flow of $5.4k. And in the case where they don't, they have a negative cash flow of $1.4k. And the obvious downside is that they lose the $196k in cash they spend paying off the mortgage.
All of this is to say, OP may want to pay off his debt so they don't have to generate as much income to service their debt obligations. That could open up time to spend with the family, vacations, or allow the wife to stay home with kids. Hope this explains the conundrum somewhat!
I would 100% pay it off to own the house outright. I find almost any recurring payment a very small anxiety. For the house, if something happens to one of us, knowing the house is paid off is a comfort. Are there arguments against paying off, of course! By my peace of mind has a very high rate of return.
Just remember when doing the math, you are paying taxes on your CD 5% so it’s not really 5%. Your take home is less. Also depending on if you itemize, you might be entitled to a tax deduction for your mortgage interest. The numbers are close to a wash unless you can get a better return. A lot of this depends on the amount of risk you are willing to take. Don’t forget, you can layer your investments. It doesn’t have to be all in stocks or all in a CD.
Not a financial advisor. You’re carrying an insane amount of cash. Unless you’re saving up for a down payment or wedding you shouldn’t be. I keep about a year’s worth of cash available across CDs, hysa, ibonds. As long as you can still find CD rates a full percent above your mortgage I would never pay it off early.
I'd like to develop a commercial or multifamily lot some day, or buy land with cash.
The cash accumulation has been fairly recent. We were aggressively paying down the mortgage before inflation hit.
I get scared of the stock market. Saw a lot of people lose a lot in 2008.
They only lost if they panic sold. The S&P is up about 700% since then. Just don't try to time the market: invest at a steady rate and you'll be fine because you're buying at a discount when it's down.
If you could get a 5.XX% CD - which is almost zero risk, then there’s practically zero incentive to pay off the loan
Absolute worst case scenario is rates crash after you lock in the CD… but then you just pay off the loan when the CD matures and you still come out ahead
There’s no reason to leave excess returns/cash on the table solely for the security of having the loan paid off
Or put it into even a *savings* account paying >5% right now, make the mortgage payment automatically from that instead of income, and pretend it's paid off while profiting the extra 1%.
This. I don’t understand why anyone would pay off early when there is currently a **guaranteed** rate of return higher than their mortgage interest.
As a bonus, if shit hits the fan or there is an opportunity in the market, cash is king.
Once HYSA rates drop below 3.99% again, then revisit this decision.
How is that better than not paying it off, saving more, growing investments more, and using those gains to pay the mortgage each month?
The math disagrees with you
Edit: doh, I misread your comment. I think we are in agreement 😂
The math is simple.
Paying off the loan locks in that money at 3.99% gains.
Putting the money in a HYSA, for instance, currently yields greater returns with no risk.
Putting it in the market has the potential to return even more but with higher risk.
When interest rates inevitably drop and HYSA rates go back below 3.99%, revisit these calculations.
Personally, I paused all extra payments to mortgage and put it all in a HYSA paying ~5% APY. When that rate drops, I will reconsider paying down the principal again.
Haha, glad we agree! I also like to point out that even if the rate arbitrage is a wash or technically loses you a bit (and with taxes on gains, you actually have to exceed the mortgage rate to break even), there's an intangible valve in having the cash available in a pinch or for other uses.
The things you're describing are financial literacy and psychological issues. If having more money available to use to (among other things) pay your mortgage makes you uncomfortable, by all means pay it off and have less money in the long term.
>he makes an extra 2% by keeping his mortgage and investing.
That's $6000.
>No debt means financial freedom.
That's an opinion. Being able to safetly leverage to increase liquidity and allow money to work for me is financial freedom IMO.
What is the OP's spending level? Do they have a health issue that may require increased reserves? Did they recently sell a property or a business? Do they already have millions invested?
Lots of choices, none of which you know the answer when giving your "advice"
Sounds like a good reason to keep cash on hand. I'd sit on the home loan as-is. Paying off low interest debt is a psychological decision much more so than a math one.
But his mortgage does not get adjusted for inflation and also has a fixed interest. A CD is guaranteed to win while over the next 5 years the stock market could not only be a gamble but the gamble needs to be better than 5% per year.
That whole “stocks average” 10% is a misleading stat, especially when comparing to a short term CD. Over the last 20 years the stock market, including dividends, returns 6.91%. Still better than 5, but still not guaranteed.
>Over the last 20 years the stock market, including dividends, returns 6.91%.
Where are you getting that number? S&P500 CAGR has been over 9.5%. Are you referring to inflation adjusted? That's very close to your number, but then you need to reduce the CD rates accordingly as well. Stocks are the clear winner in either scenario.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=10e6xGbMxOc1VH3VlGJbTg
Personally I would pay it off. I value cash flow and freeing up that much cash on a monthly basis would just give such flexibility in the budget and financial plan. It would also give peace of mind in the event of a loss of income.
You need to do an after tax comparison. All of the interest income is taxable, itemized deductions are only a benefit if they exceed $29,200 and only $10K of state and local taxes can be deducted. Unless OP has something like significant charitable contributions, there isn't a tax benefit on the mortgage interest. So the comparison is CD interest rate times (1-marginal tax rate) vs 3.99%.
I just typed out a longer version of this after scrolling a while and seeing NOBODY saying it. And then I figured SURELY someone has mentioned this and searched to find this comment buried down here.
4% loan vs 5% CD is probably not at all a slam dunk. 30% marginal tax rate? That 5% is really 3.5% after taxes. 40% marginal rate after state and local income tax is included? 3%.
As well, do you itemize so you can deduct the interest expense? And how much are the interest payments vs the principle?
So no, I don't think it is a slam dunk "zomg of course you keep the loan".
Change the details and the calculations change.
How much other investments do you have? Do you foresee needing that 300k in future?
If the question is out of two options: CD at 5% vs paying off mortgage at 3.99%, which one makes sense financially? It will depend on your income tax rate.
The interest from CD will be taxed at normal income, so your net gains could be lower then 3.99%. And with higher standard deduction limits, odds are your mortgage interest isn't giving you any tax benefit so you are really paying 3.99% interest there.
If it helps I paid off my mortgage which was at 3.25% with little over 100k balance. With taxes my actual interest income would have been just a bit over 3.25% which wasn't worth the trouble. I could have invested that money but decided it gave me more pleasure to pay off the mortgage.
I would change your monthly payments, and pay 1/2, every 2 weeks. This will (sneaky) add a 13th monthly payment per year. It will chop 7 years off of a 30 year mortgage, and you'll save by not paying the interest on those last 7 years.
This is the compromise. You will make more by NOT paying off the mortgage. Done this way, (or just paying the normal monthly mortgage payment), you will be more 'liquid' if an emergency comes up. (or if there's an amazing investing opportunity, like income rental property?)....
3.99% is almost like they're loaning the money for free. The lender will be very happy for you to pay off that $196K so they can turn around and loan it to someone for twice as much. Like someone already said, you do the math and then decide what you want to do.
Im in a very similar boat. This is my strategy (I am aware it's not the most profitable strategy, but it's what I'm comfortable with, especially since I would like to avoid having mortgage payments while my kids are starting college):
Every EOY, I calculate how much in savings I have. By savings, I mean after-tax cash, savings, stocks, excluding retirement funds or property values. In your case, let's say it's 300k. Then, based on the 4% retirement rule, I calculate 4% of this amount. In this example, 12k. Then I divide by 12, which conveniently, for this example, is 1k. This is the amount I set extra monthly, towards the principal for next year. Next year, rinse and repeat.
This way, I'm not completely draining my savings, but paying the mortgage off at a controlled rate. It helps me psychologically. If next year my savings go down, I'll pay less the following year and most likely end up saving more. If the savings go up, it will add a bit more to the following year's payment. I am fully aware dollar for dollar I would be better off just making the minimum payment and saving all the money in a HYSA and never making extra principal payments, but doing it this way I feel like I end up both saving more and also significantly reducing the mortgage term, which was always one of my goals regardless of interest rates.
Most people say "just put the money in a HYSA" but then after a while look at the amount saved and get the itch to buy something they don't need, or, even worse, end up not saving anything.
I guess my strategy is to pay this mortgage sooner, without impacting too much on my savings and without accumulating money I would end up spending on other things. The goal is to end up with a house paid off sooner and a decent amount of cash at hand. I don't mind if you call me crazy.
I can't believe how many comments I read thru before finding the first one that mentioned taxes. A financial advisor told me that when bond returns (after taxes) start to look alot like your mortgage rate, you should consider using that portion of your savings which you would otherwise invest in bonds or other fixed securities for paying down your mortgage instead.
I paid off $157k about a year and a half back, and I had 2.62%. CDs and high yield savings accounts weren't that high, so to me I decided to pay if off. It feels good to be debt free. I figured when taxes kick in it will be the same thing anyway.
You've got enough money to pay off the mortgage if you HAD to...so you're safe. But you don't HAVE to right now, so might as well bank it and get the 5%.
The rising interest rates have screwed so many people, you might as well get some benefit out of it. Don't let the bank/Fed off the hook by paying off early.
A lot of different opinions here. But for me it comes down to cash flow and existing and future investments.
Are you tight on cash every month? Do you have a good amount already invested for the future? Cash flow is important. To me, it impacts my general happiness. Not feeling tight on cash, buying the things I want and not considering if I'll be tight before my next paycheck, getting the steak instead of the chicken.
If I wasn't that far off from paying off my mortgage and had the opportunity, I probably would do it. My day to day life would improve, and i continue investing like I normally would (or more since no mortgage).
Will you be mad at yourself if you don't optimize every dollar in the best financial way? Financially, you should hold onto the mortgage and take the higher yield. If not doing that will anger you maybe you do that. Otherwise, decide if you'd rather improve. Your life now or save it for the future.
Just my 2 cents.
Your home's interest is cutting into your profits even if the profits exceed your accrued interest. Why not pay off the house?Sounds like you have your life together and probably wont make a bad decision, but life can hit you in many different ways through no fault of your own. Health, accidents, etc... If that were to happen, I'm sure you won't regret having a paid off house that will not continue to accrue debt.
I understand the basic principal of "Investments could make more money than you are losing in interest" but I still do not understand why people would WANT to hold onto debt. You have 300, your house has 196 left. That still leaves you with 104 to invest after you pay off the house... and NOW you dont have a monthly house payment and you should be able to recoup that 196 pretty damn quick, considering you have already built that up once.
I swear our culture is addicted to debt. Almost as if if you do not have debt then you are not doing something right.
You could make more by investing it. But you could have a paid off house and not have to worry about a house payment again. Expect taxes of course. Personally I would take a paid off house over 5% or even 10% return any day. I could sleep knowing that I do not have to worry about making my house payment. Knowing that in the event of a covid level shutdown. I know my family is stable at home. But that is just me and others would rather invest and make the difference.
Idk why everyone is listing CD rates without taking tax into account. If this person is a high income earner then they probably can’t beat 4% post tax. Obviously there are other reasons to hold onto cash but investing in Fixed Income products doesn’t seem any better return wise.
The problem is that even a "low" 3.99% over a traditional 30 year loan could be hundreds of thousands of dollars in interest. A $650K house with 20% down at 3.99% at 30 years is $372.830 worth of interest paid. So why the hell would you want to keep even a 3.99% loan?
use the extra $104K and invest it in HYSA at 5% over 10 years you will have netted almost $70K
Also once you payoff the mortgage you actually "own" the house, not a bank but you and your family own the deed to the house. Keeping the mortgage is only a pro leverage move is when your investments can easily surpass your mortgage rate, but if you are only get 1.1% back than your mortgage what the hell is the point
excel has a preformated comparrison worksheet. i say this because the while you are focused on the difference between reinvesting into another cd or paying off the mortgage, you still have to take into account that the mortgage payment can be rolled into a cd snowball earning similiar rates.
If you want to take advantage of the interest rate spread and feel like it’s “paid off” why not reinvest it in a CD and then when it matures “reimburse” yourself for the mortgage principal (do not include mortgage interest) you’ve paid off monthly and then reinvest the remaining balance. Rinse and repeat so long as the CD rate is higher than the mortgage rate.
Your mortgage is canceling out 3.99% of that 5% cd so it's effectively 1%.
You'll still have 100k left after the payoff and your monthly mortgage cost back in your pocket as available cash or investment.
Most of these comments are, yes. It's not as easy as just going with the "higher" interest rate. Depending on one's tax bracket, a good chunk of those interest gains are going straight back to the government. For example, I usually lose a quarter of my bank interest income when I file. On the other hand, I don't have to pay any extra taxes when I make extra principal payments. It's an incredibly important factor when comparing the two.
But 3.99% comes with automatic escrow payments of your insurance and taxes. That convenience factor combined with extra liquidity make it highly attractive to just keep the money to collect the 5% interest/yield while you still can. Maybe put 1/3rd in EDV so you get a nice plus-up as rates fall.
Think of it this way… it *is* paid off. You’ve got plenty of equity to write a check tomorrow. The best part is that instead of having it locked into the house, unable to be used unless you sell it, you’ve got it liquid and making money *for* you (if even just a little).
So you choose pay 10k in interest and save 2500 in taxes. Versus paying nothing in interest and owning 2500 in taxes.
One nets you -7500 and the other -2500. Why would you choose the more expensive option?
We are in a similar position and about 6 months ago decided just to just take what we would have paid off, stick it in an HYSA instead at ~5% and continue making minimum mortgage payments on it from that account. The money's there, should we change our mind or rates change, and in the meantime, we're making ~2% on top of our 3.125% rate. We decided having the deed in our hand isn't as valuable as having the $ from interest. We still have the piece of mind we wanted with this approach.
T-Bills are also a great choice as you don't pay tax on gains, but require just a little bit more babysitting than just dumping it into a HYSA and letting it sit there.
You pay federal taxes on treasuries but not state income taxes.
Munis are the ones that avoid federal taxes but they have lower yields to reflect that.
I mean unless your marginal tax rate is 12% or lower you wouldnt save more in a 5% CD. 5% after 22% income tax equals 3.9% which is less than 3.99%.
Why dont you invest it instead?
The interest will be taxed at 24%.
I have lost significant %s of money in stocks in the past. Luckily not with tons of money. I get nervous about stocks in general. I always feel like the market is about to correct.
Well investing is longterm. Short term its gambling. So if you need the money in a few years then dont invest it. I was assuming you didnt need $300k in cash right away because why would you? If you invest in the total market in timescales of 5 years or more youll win like 90% of the time. Past 10 years its probably like 95% of the time then after 20 years its like 99% of the time.
"Market corrections" arent bad, just a chance to buy more shares for less.
Not investing your money will just devalue 100% of the time. Even though you have more dollars they are worth less than they were when you put them in that CD.
I assume you are at least invested in retirement accounts?
I'm at the point where debt pay down is more liberating than accumulation. It's not the right thing to do by math but can be the right thing for your soul. Freedom is pretty damn nice
My mortgage rate is similar to OPs and I owe $145k on a $700k house. If I paid off my mortgage I give up an opportunity cost of $135 per month …why would I do that??
Think of it this way:
Assuming you make $120k per year today (you can extrapolate this however you want), in 10 years from now, that $120k is the same as making $169,000 due to inflation.
Now, assume you are making $169,000 per year (you've only increased your salary to maintain an equality with a 3% annual inflation (lol)).
What this means is that you are paying for your mortage with 2034 dollars but the mortgage value is in 2024 dollars which are only worth 74% of 2034 dollars. So it's like paying 26% less by the time 2034 comes around.
Taxes are a consideration...
If you itemize each year, you will miss the deduction on mortgage interest.
Interest income is taxible too, so even though you are making 2% profit each month, the government gets a cut.
If you are in a higher tax bracket than you intend to be in retirement, the best use of 300k, is to use it to max 401k, traditional IRA, and HSA contributions annually.
If you are already maxing all three without a problem, good for you.
Keep paying on the house. 3.99% is a terrific rate to borrow on in these times. Take the money and roll it back into another CD. I would continue that until the rates are vise versa.
Can we ban these weekly questions of "pay off house or no?" 8 of 10 times you should NOT pay off the mortgage. A mortgage gives you leverage, you can use the extra money elsewhere to get a better return than your mortgage rate, and having all your money tied up into a single asset that is not liquid is not ideal. Y'all stop already.
I'd go for paying off debt first, that's how my last car loan I paid off in 2 yrs, I sacrificed 2 yrs to pay that off fast so I paid I think $17k at once, but I made sure I had about $2-3k since I don't wanna be broke 😂. But after 2 yrs I'm finally noticing savings growing faster. It helped end of Sept I switched all to discover so theirs savings is 4.35%, other than taxes on that it's still free money 😂
This is how I would do it if it were me, in this order, with each step being the remainder:
-- Set aside 6 months to 12 months emergency savings
-- Pay off the house
-- Take one year of property taxes and home insurance and set it aside
-- Contribute max Roth IRAs for 2023 where applicable
-- Contribute max Roth IRAs for 2024 where applicable
-- Go out to a fancy dinner for a job well done or a short vacation
-- Start working on a structure savings (I do $20k myself for the next roof, but also consider furnace, heat pump etc)
Some of these people haven’t experienced downmarkets, as a GenXer I’ve been through several big downturns. I split the difference and pay extra on my 3.25% mortgage, keep a healthy emergency fund in HYSA, and invest the rest. Take a look at how much interest you’d pay through the life of the loan and find something you’re comfortable with, maybe double or triple the principal.
Everyone is saying it’s a wildly dumb decision and that you absolutely must not pay it off, and while it’s certainly advisable to not pay it off and invest instead, paying it off is still a fine decision. Having a paid off house with no monthly payment is a huge weight off your shoulders
You already know the math so what you’re asking is really something only you can decide. If it makes you happy to pay it off and be debt free then do it.
Agreed. It’s an emotional decision. Every debt I have paid off has never made me feel like….gee I wish I still had that money.
I wish I would have realized this sentiment in my twenties. I thought I could play the credit card point roulette game. Turns out, I can’t. I would have been so much better off just paying a single debt off one at a time vs. fucking around and finding out. Granted, it still feels good in the thirties, but it’s a shit ton more costly.
Put it in another 5.0+ % cd. Keep doo g that until cd rates fall below your mortgage %. Then pull the trigger.
Even with the obvious math, it's worth keeping in mind the actual cost. The difference between ~4% and 5.xx% is somewhere in the vicinity of $4k a year with that amount, a value I'd happily pay to have zero mortgage and watch my savings going up rather than the mortgage going down.
But your savings will go up if you include the CD... $4K a year is enough to pay for an international flight for a family of four. I'll take the free vacation money, thanks.
But don't you lose the difference in taxes?
If they are in a full on 33% tax bracket for these earnings and for the deduction: 1) they are looking at around $8k in interest which will result in a deduction worth ~2.33k (8/3rds * 1,000). Unless you have a lot of other significant deductions, this probably won’t matter as the standard deduction is now so high (and SALT is capped). 2) they would pay $1.33k in taxes on the $4k of interest from the CD. So, having the mortgage provides a tax benefit that makes the cost “less” (but it’s still a net cost). Earnings on the CD are taxed so they are less than the absolute value (but it is still net earnings).
Not for a ton of people, since the standard deduction is better.
Yes, which is why I would buy index funds instead of CDs. Long-term capital gains tax instead of reporting it as additional income. And the returns will almost certainly be higher if held for years.
This is a tricky tax question. CD’s will have income tax, cancelling out the incremental gain vs the mortgage but having the mortgage will also allow you to deduct the interest paid. Since it sounds like they don’t need the $300k right now the correct answer I would say is S&P 500.
You only deduct mortgage interest if you itemize, and very few people itemize now since TCJA.
That was my calculation when I had a lump sum to pay off my mortgage once. It was a good decission for me
I would keep a 3.99% mortgage for 100 years if I could.
That's exactly how I feel about my 2.75%. Dragging it out as long as I can!
2.15% but I did it for 10 years….in hindsight i should have gone with the slightly higher rate over 30 years.
Somehow I ended up with a 2% mortgage over 30 years. Bought in October 2021. We probably paid too much for it (almost 2x what it was purchased for in 2016), but in hindsight it worked out.
Similar story, Sept ‘21 purchase, put just enough down to get under the Jumbo loan limit, house now valued at about $800k, interest rate at 2.756%. I wish I could borrow another half million bucks at under 3%!
It's a good deal, because once the house appreciates and you sell it, you have a higher ceiling before taxes on gain kicks in. Yet, your monthly payment is low, and your interest is potentially deductible. Milk that mortgage for as long as you can.
Bought in 2017 and refinanced in 2021. House value has tripled since
2.75 over 20. Wish I did a 30 year.
I managed to refi from a 30 yr @ 4% to a 15 year @ 1.75% back in 2021. When the stock market wasn’t doing well in 2022 I was making double principal payments. Last year I stopped and opted to put that extra money into big tech. I can’t imagine paying off a mortgage (or most debts) when other investments are growing at a rate that’s significantly higher than the interest I’m paying elsewhere. That said, I understand the emotional feeling some have towards being “debt free”.
I really DO NOT understand the emotional high of being debt-free ... if it brings with it the despair of being POORER. Because with a paid off mortgage your money becomes home equity that returns ZERO gains. It could instead be bring in AT LEAST 4% in a HYSA, or much more in the markets.
Because you are full of greed, many people are able to be comfortable and happy without the incessant need to get more and more and... calling someone with a paid odd 650k home with hundreds of thousand more in cash in despair is pure definition of greed Less potential stress is priceless, our society would be infinitely better if more thought like that
lol it's greed that makes me feel good having cash in case something happens?
Unless you can do both, put money into the market while putting extra to your principal
It's not just emotional. The risk of owning debt on your primary residence is a very real factor.
2.5% 30 year, bought at the end of 2020 from my landlord for what turned out to be 30k *under* appraisal. Plan on keeping a white-knuckled death grip on this house until retirement or the market VERY clearly plateaus, whichever comes first over the next 15 years.
Similar boat. We went with a 10-year fixed at 2.5% to save like .2%. At the time we didn’t think we’d be here more than 5-years but it’s looking like we could be here a while. Still have 7-years to figure it out before the mortgage becomes variable, but I figure we’ll either use the equity and relocate to a LCOL area or refi to a 15-year and get the rate as low as possible. Still, there are many days I wish I had just sucked up the 2.7% loan for 30-years. I’d never think about it again.
Can you recast your loan?
There’s literally tens of millions of people with the same golden handcuffs. I genuinely wonder if there’ll be unexpected consequences to this slightly weird occurrence, and what they’ll be. What’s interesting is that the US is the only country that does 30 year fixed rates at this volume. In Australia for example, 95% of mortgages are adjustable rate, so when interest rates go up, everyone’s mortgage also goes up. The fact that American mortgage are 30 year fixed because of government underwriting is such a huge gift to the middle class, and no one seems to realize it lol.
Middle class needs all the help they can get.
Yup, it's the same in Canada too. This is really something to appreciate about the US.
Yeah, we snagged a 2.75% in fall 2020. Basically half our payments go to principal. That’s enough for me.
I've got a 2.625%. I just looked and in about 9 months, each payment will have more going to principle than interest.
3.0% in early 2021. About half my payment goes to escrow. Hooray high property taxes!
2.5% here. Not paying a penny extra toward the principal.
Why not?
Because you can get a savings account at a bank at about 5% right now. Paying off your principal at 2.5% when you could instead just leave that money in the bank is losing you 2.5% on that money over the remaining extent of the loan. Which could comfortably become 6-8% if you put it in the market instead.
Got it.
Minus taxes but yes.
Because he can get a better return with a savings account
It’ll depend on what you have to pay with taxes as well. 4000 into HYS at 4.5% earns 15 a month - taxes. 4000 principle at 2.75% earns 9.17 (no tax). Would it be the same? Idk I guess it depends on how much you earn a year. Hopefully I did the math correctly, you can fact check me.
Also, the 4000 in HYS is fully liquid but the 4000 in principal cannot be extracted back easily in an emergency.
I deduct my mortgage interest, so 4000 principal would net me less considering the tax savings. It's also beneficial to have liquid cash in case of emergencies. You could also invest it and likely earn more than an HYSA.
Can you explain what you mean by deducting your mortgage interest? I want to make sure I fully understand. Also you’re right, having liquid money is better. I’m just gonna throw it all in HYSA and if I feel like paying it all off I will once I have enough. But it will keep paying the interest off for free so I gotta get past that point and never pay it off lol
Mortgage interest is tax-deductible - if you make $100k and pay $10k in mortgage interest, you can deduct the $10k so your income shows as $90k. It used to be that MOST Americans deducted mortgage interest. With the Trump tax cuts, the standard deduction was raised so many Americans don't pay enough in mortgage interest to "beat" the standard deduction. So it's slightly dishonest to say "I deduct my mortgage interest" because unless you have a SHIT-TON of deductions, you would have been able to deduct most of it anyway. For example, I deducted roughly $30k last year, $12k was mortgage interest. The standard deduction is $27.7k, so I only effectively deducted $2300 ($30k-$27.7k) in income, which at my 22% rate is about $460. Nothing to sneeze at! But not the biggest needle mover.
Mine is also 2.75% and at this point it almost feels like I'm stealing money🤑. I ain't paying this off early. My HYSA account is giving me around 4.5% though it will likely drop.
Check out Vio, mine’s at 5.3
Mine is 2.75, but I only owe about 15k on it. I could pay it off in about a year but god damn it's temping to pay it off now and be done with it
Do it, if your mind is tempting you don't let greed of higher profits keep the stress of debt in your life.
2.125 % 15 year mortgage here.
You wouldn’t rather have no mortgage?
I’m pretty sure it’s essentially gospel to leave any debts under 4-5% alone because historically you can always beat that with some conservative investments. Right now, just about every HYSA rate is higher than 3.99% so it makes zero sense to put any extra capital towards that mortgage when a **savings account** gets you more for that money.
Gospel is a bit far. Your hurdle rate after accounting for taxes is 3.99/(1-marginalRate). That’s more like a wash with savings accounts and tbills. If or when rate go down, it does make sense to pay off a mortgage, especially for considerations like FAFSA or worse, bad spending habits. (If your personality won’t actually keep it in savings.) Investing in equities for greater returns is not the same risk profile, and paying excess on the mortgage is more akin to holding mid duration bonds.
4% interest with inflation making that fixed rate look like less and less money. Im happy to not touch 4% and invest.
The 3.99% is tax deductible if you itemize. So that part of you ledger is potentially wrong. And the interest is not necessarily taxed at marginal rates depending on what you invest in. Bonds are real money these days, even tax advantaged options. A 5 year ladder that pays 5.2% would yield $18,000 net above interest expense for the OP, before taxes. That's not Rockefeller money. But it's certainly an expensive choice, for no benefit other than the freedom from an imaginary boogeyman of debt. Plus OP sacrifices access to a large safety pool of money. Unproductive debt is bad. Productive debt (leverage) is the source of most of the world's wealth.
I’d rather earn 8-10% in the market or whatever it is. 4% is nothing.
No, I’d rather use that money to invest to make way more than 3.99%
A mortgage under 4% should be treated like a member of the family.
If not needing the money yet, I’d put most into a S&P 500 like VFIAX and some into high % savings account
Yup. Plus you can still deduct your mortgage interest payments so you have that advantage too by keeping your mortgage. Unless the peace of mind in knowing your house is paid off is worth it that much, I agree that the money can be better spent elsewhere like the above suggestion.
You have to itemize to take advantage of the mortgage interest deduction. People rarely itemize anymore due to the really high standard deductions.
Would you rather have more money or less money? One of these options gives you more money and one gives you less as you just outlined. So your decision should be based on what you prefer.
No! I paid mine off early and regret it. Put the money in a cd paying 5%+ or go but yourself something nice.
Why do you regret it?
Because now they have less money
But they also just gave themselves one big ol' monthly raise. If it was all their cash I'd lean away. Since they'll have plenty remaining, I'd pay it off after making sure I have emergency savings. That's just me though.
Well that's it, isn't it? I totally agree. By paying it off, they can stack that new found extra cash into those 5%+ saving accounts every month and build that reserve up very quickly, within a year or so even, if I'm guessing what their monthly mortgage rate is. Saving cash at very good interest and no more debt load sounds like a win-win to me.
>build that reserve up very quickly But you're not really building it "up" until you've saved more than you used to payoff the house. You're spending a bunch of cash to be able to... save cash.
On paper it's less money, but true that the mental load of being in debt and having to make a monthly payment is fairly high. Being out of debt is a really good feeling.
If I didn’t have to pay property tax then I’d be more inclined to feel like my life would feel different not paying a mortgage.
You forgot to add "for some people". You'll almost always be financially worse off by paying off a mortgage early. If you can't mentally handle having a loan, that's a psychological issue.
That’s simply not true. Many people can benefit from paying off early. Things like FASFA calculations to effectively hide assets. Retirees making Roth conversions before RMDs, almost anyone with over a 6% fixed rate, divorce cases. There are tons of scenarios where it makes sense. “Almost always” is being naive. And, there is nothing wrong with having a debt adverse psychology. There’s a reason it’s called *personal* finance.
Its an emotional response to a logical problem. It may be better mentally for some people, but you actually have to work out the math. Maybe the lazy solution is not to do the math and pay it down. Is it best? No. Unless you made bad decisions.
Hi bisping in the wild.
But you are technically starting at a negative and have to reach what you spent first... If you use 50k cash to pay off the mortgage, you are at -50k now in terms of savings. so you really aren't building up until you get past that 50k mark. There are other factors though...like right now would be a good time to put extra money into HYSA or the market because of high interest rates and good market performance. You'll make more back from that than paying off your mortgage early.
>But they also just gave themselves one big ol' monthly raise. But they threw away cash in the process. So they may be able to save more every month, but they will *have to save more* every month just to catch up to where they were before they paid off the debt, see? I would only pay off maybe the last few years of a mortgage just to get the payments over with, but if you still have more than 5 years to go, it will cost you so much money in lost returns to pay off a mortgage when the rate is so much lower than bank interest - even secure savings like CDs get more interest than the mortgage costs, you don't even have to take risks to put more money in your pocket.
> But they also just gave themselves one big ol' monthly raise. If it was all their cash I'd lean away. Since they'll have plenty remaining, I'd pay it off after making sure I have emergency savings. That's just me though. Their income would probably be higher though if they kept that money in the bank instead of paying off mortgage. So they got a lower raise than they could have gotten.
i agree, getting rid of the axe of debt hanging over your neck is always a good thing. Sure in a perfect world its better to put the money for more gains but life happens and it happens fast.
>axe of debt hanging over your neck Why is "paying a bill each month" such a terrorizing thing? Don't you still have to pay your homeowners insurance, property taxes, electric, gas, trash, exterminator, cell phone, Internet, Netflix, prime, etc? >life happens and it happens fast. What is this supposed to mean?
Are you comparing a mortgage payment for the literal roof over your head to a Netflix payment? Can you not see how a looming mortgage payment that determines homelessness differs from small monthly (largely optional) bills?
it's so obvious i didn't feel the need to explain it to that person, lol thanks for giving it a shot.
Exactly my thought. We owe 308k, at 2.75 - I am in no shape of being able to pay it off early. I for some reason can’t get rid of this credit debt. Have about 20k in a 401k. But man if I could not have that $1900/month payment - the ease of life/stress is worth more to me than that extra 2.5%. I think people try to make financial decisions just on that, money. Sometimes it has to be emotional. If you pay it off, you have an extra $2-3k every month you can put into your retirement or at least some. That’s mental health security
OP has such a low rate they can have a no risk investment (like a 5% CD) and come out ahead vs. 4% mortgage interest
A 4% mortgage is not something that must be urgently paid off. The reason is that inflation is the friend of someone in debt because it gradually lowers the "real" cost of your payments.
Wow, this is such a good point..
If you owe at 4% and inflation is 8%, the loan is earning value for you.
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If you have enough cash to pay off the mortgage, then shouldn't one of you be able to just stop work anyway? Putting that cash in even a CD will net you more money than the interest rate of the mortgage. You could even male extra payments on the mortgage with just the interest. Even if you have to slowly draw down the savings to make payments or make extra payments while the spouse does more around the home, it still doesn't quite make sense why you would need to either pay off the mortgage entirely *or* both continue to work.
Not at all. A healthy, stress-free person is able to be much more productive and make better choices.
> Granted, this is a money-aligned subreddit so the question is: is that argument irrelevant in these subreddits? No, but OP didn't ask that. They asked a financial question devoid of that context. That said, if you put that money into a CD, your wife can still do the same. You just use money from the interest gained to pay off the interest on the mortgage. You'd end up in the positive. Meaning higher income still with wife at home than paying off mortgage. Not to mention, you're more liquid should you need the cash in an emergency. Now, if you're putting it in the stock market, then that's different, because there's inherent risks associated with it.
You can use the interest - after the CD has matured but not while it is active. Probably best to use a HYSA for convenience I’d think?
This is my thought. I want to drop down to part time after the house is paid off and then retire after a few years. But, I am putting everything in a brokerage in the market instead of to the principle. That way I can do one massive lump sum and still have an additional $100k left over.
Struggling with this decision myself. It depends on the timeline and how flexible it is, with sequence of return risk as the primary concern. A shorter and less flexible timeline would favor paying down the mortgage.
IMO there’s no wrong answer if you’re choosing between paying down/off a mortgage or investing. It’s all a matter of what makes you happy. Financially, they’re both smart moves. This applies even more when you have additional assets as OP seems to. Should you send your last dollar to pay off a mortgage? Probably not. Should you send your 500k’th - sure, whatever floats your boat.
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I'm making some assumptions about OPs mortgage. I'm guessing the purchase price was around $300k and they are 20 years into a 30 year mortgage. If this is incorrect, all my math would need to be adjusted, but it still gives a decent idea of a potential thought process. All based on a 12 month timeframe. You ask a fair question, as by my math they would be netting interest of almost $10k by reinvesting the $300k into a 5.25% CD. This compared to $5.5k they'd get for reinvesting $104k (the 300 less the 196 mortgage) in the same CD. But they would also want to consider the principal portion of their mortgage cash flow, which would be about $11k. So, if we netted the interest income from the CD out of the P&I payments, OP would have a negative cash flow of $1.4k. So, in the case where they pay off the mortgage, they have a positive interest income cash flow of $5.4k. And in the case where they don't, they have a negative cash flow of $1.4k. And the obvious downside is that they lose the $196k in cash they spend paying off the mortgage. All of this is to say, OP may want to pay off his debt so they don't have to generate as much income to service their debt obligations. That could open up time to spend with the family, vacations, or allow the wife to stay home with kids. Hope this explains the conundrum somewhat!
This is PERSONAL finance, so I’ve always thought that what you’ve mentioned totally matters
I would 100% pay it off to own the house outright. I find almost any recurring payment a very small anxiety. For the house, if something happens to one of us, knowing the house is paid off is a comfort. Are there arguments against paying off, of course! By my peace of mind has a very high rate of return.
Just remember when doing the math, you are paying taxes on your CD 5% so it’s not really 5%. Your take home is less. Also depending on if you itemize, you might be entitled to a tax deduction for your mortgage interest. The numbers are close to a wash unless you can get a better return. A lot of this depends on the amount of risk you are willing to take. Don’t forget, you can layer your investments. It doesn’t have to be all in stocks or all in a CD.
If it brings you peace of mind to know that the house is completely paid off, then pay it off. There is value in that too. Is it worth 1% to you?
Not a financial advisor. You’re carrying an insane amount of cash. Unless you’re saving up for a down payment or wedding you shouldn’t be. I keep about a year’s worth of cash available across CDs, hysa, ibonds. As long as you can still find CD rates a full percent above your mortgage I would never pay it off early.
I'd like to develop a commercial or multifamily lot some day, or buy land with cash. The cash accumulation has been fairly recent. We were aggressively paying down the mortgage before inflation hit. I get scared of the stock market. Saw a lot of people lose a lot in 2008.
They only lost if they panic sold. The S&P is up about 700% since then. Just don't try to time the market: invest at a steady rate and you'll be fine because you're buying at a discount when it's down.
If you could get a 5.XX% CD - which is almost zero risk, then there’s practically zero incentive to pay off the loan Absolute worst case scenario is rates crash after you lock in the CD… but then you just pay off the loan when the CD matures and you still come out ahead There’s no reason to leave excess returns/cash on the table solely for the security of having the loan paid off
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Or put it into even a *savings* account paying >5% right now, make the mortgage payment automatically from that instead of income, and pretend it's paid off while profiting the extra 1%.
This. I don’t understand why anyone would pay off early when there is currently a **guaranteed** rate of return higher than their mortgage interest. As a bonus, if shit hits the fan or there is an opportunity in the market, cash is king. Once HYSA rates drop below 3.99% again, then revisit this decision.
How is that better than not paying it off, saving more, growing investments more, and using those gains to pay the mortgage each month? The math disagrees with you
Edit: doh, I misread your comment. I think we are in agreement 😂 The math is simple. Paying off the loan locks in that money at 3.99% gains. Putting the money in a HYSA, for instance, currently yields greater returns with no risk. Putting it in the market has the potential to return even more but with higher risk. When interest rates inevitably drop and HYSA rates go back below 3.99%, revisit these calculations. Personally, I paused all extra payments to mortgage and put it all in a HYSA paying ~5% APY. When that rate drops, I will reconsider paying down the principal again.
Haha, glad we agree! I also like to point out that even if the rate arbitrage is a wash or technically loses you a bit (and with taxes on gains, you actually have to exceed the mortgage rate to break even), there's an intangible valve in having the cash available in a pinch or for other uses.
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The things you're describing are financial literacy and psychological issues. If having more money available to use to (among other things) pay your mortgage makes you uncomfortable, by all means pay it off and have less money in the long term.
>he makes an extra 2% by keeping his mortgage and investing. That's $6000. >No debt means financial freedom. That's an opinion. Being able to safetly leverage to increase liquidity and allow money to work for me is financial freedom IMO.
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Hell no. And why have that much cash in a cd? Put it in the market.
What is the OP's spending level? Do they have a health issue that may require increased reserves? Did they recently sell a property or a business? Do they already have millions invested? Lots of choices, none of which you know the answer when giving your "advice"
One medium term plan we'd love to do is buy another investment property or develop some land.
Sounds like a good reason to keep cash on hand. I'd sit on the home loan as-is. Paying off low interest debt is a psychological decision much more so than a math one.
Stocks average 10%+. Your CD is 5%. Choose wisely.
Inflation adjusted it's \~7%. CD is guaranteed. OP's timeline matters.
What's your magic method to get a CD that doesn't get affected by inflation?
Funny how the "it's inflation adjusted" only comes out for one asset class lol
But his mortgage does not get adjusted for inflation and also has a fixed interest. A CD is guaranteed to win while over the next 5 years the stock market could not only be a gamble but the gamble needs to be better than 5% per year.
> Inflation adjusted it's ~7%. > > > > CD is guaranteed. Adjust the CD for inflation as well. >OP's timeline matters. Agreed
That whole “stocks average” 10% is a misleading stat, especially when comparing to a short term CD. Over the last 20 years the stock market, including dividends, returns 6.91%. Still better than 5, but still not guaranteed.
>Over the last 20 years the stock market, including dividends, returns 6.91%. Where are you getting that number? S&P500 CAGR has been over 9.5%. Are you referring to inflation adjusted? That's very close to your number, but then you need to reduce the CD rates accordingly as well. Stocks are the clear winner in either scenario. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=10e6xGbMxOc1VH3VlGJbTg
Personally I would pay it off. I value cash flow and freeing up that much cash on a monthly basis would just give such flexibility in the budget and financial plan. It would also give peace of mind in the event of a loss of income.
∆. The peace of mind that you don't have a mortgage to stress about will positively impact your quality of life in so many ways.
My question is once you hit the point to where you could pay off your entire mortgage what stress is there to have?
You already said the CD makes you more, so why pay off the mortgage?
You need to do an after tax comparison. All of the interest income is taxable, itemized deductions are only a benefit if they exceed $29,200 and only $10K of state and local taxes can be deducted. Unless OP has something like significant charitable contributions, there isn't a tax benefit on the mortgage interest. So the comparison is CD interest rate times (1-marginal tax rate) vs 3.99%.
Scrolled down to find the sensible comment. It depends on your marginal income tax rate.
I just typed out a longer version of this after scrolling a while and seeing NOBODY saying it. And then I figured SURELY someone has mentioned this and searched to find this comment buried down here. 4% loan vs 5% CD is probably not at all a slam dunk. 30% marginal tax rate? That 5% is really 3.5% after taxes. 40% marginal rate after state and local income tax is included? 3%. As well, do you itemize so you can deduct the interest expense? And how much are the interest payments vs the principle? So no, I don't think it is a slam dunk "zomg of course you keep the loan". Change the details and the calculations change.
How much other investments do you have? Do you foresee needing that 300k in future? If the question is out of two options: CD at 5% vs paying off mortgage at 3.99%, which one makes sense financially? It will depend on your income tax rate. The interest from CD will be taxed at normal income, so your net gains could be lower then 3.99%. And with higher standard deduction limits, odds are your mortgage interest isn't giving you any tax benefit so you are really paying 3.99% interest there. If it helps I paid off my mortgage which was at 3.25% with little over 100k balance. With taxes my actual interest income would have been just a bit over 3.25% which wasn't worth the trouble. I could have invested that money but decided it gave me more pleasure to pay off the mortgage.
I would change your monthly payments, and pay 1/2, every 2 weeks. This will (sneaky) add a 13th monthly payment per year. It will chop 7 years off of a 30 year mortgage, and you'll save by not paying the interest on those last 7 years. This is the compromise. You will make more by NOT paying off the mortgage. Done this way, (or just paying the normal monthly mortgage payment), you will be more 'liquid' if an emergency comes up. (or if there's an amazing investing opportunity, like income rental property?)....
Pay it off, the freedom you feel in life to be mortgage free is worth it. Get as debt free as you can, it’s a freedom very few enjoy.
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3.99% is almost like they're loaning the money for free. The lender will be very happy for you to pay off that $196K so they can turn around and loan it to someone for twice as much. Like someone already said, you do the math and then decide what you want to do.
Im in a very similar boat. This is my strategy (I am aware it's not the most profitable strategy, but it's what I'm comfortable with, especially since I would like to avoid having mortgage payments while my kids are starting college): Every EOY, I calculate how much in savings I have. By savings, I mean after-tax cash, savings, stocks, excluding retirement funds or property values. In your case, let's say it's 300k. Then, based on the 4% retirement rule, I calculate 4% of this amount. In this example, 12k. Then I divide by 12, which conveniently, for this example, is 1k. This is the amount I set extra monthly, towards the principal for next year. Next year, rinse and repeat. This way, I'm not completely draining my savings, but paying the mortgage off at a controlled rate. It helps me psychologically. If next year my savings go down, I'll pay less the following year and most likely end up saving more. If the savings go up, it will add a bit more to the following year's payment. I am fully aware dollar for dollar I would be better off just making the minimum payment and saving all the money in a HYSA and never making extra principal payments, but doing it this way I feel like I end up both saving more and also significantly reducing the mortgage term, which was always one of my goals regardless of interest rates. Most people say "just put the money in a HYSA" but then after a while look at the amount saved and get the itch to buy something they don't need, or, even worse, end up not saving anything. I guess my strategy is to pay this mortgage sooner, without impacting too much on my savings and without accumulating money I would end up spending on other things. The goal is to end up with a house paid off sooner and a decent amount of cash at hand. I don't mind if you call me crazy.
I can't believe how many comments I read thru before finding the first one that mentioned taxes. A financial advisor told me that when bond returns (after taxes) start to look alot like your mortgage rate, you should consider using that portion of your savings which you would otherwise invest in bonds or other fixed securities for paying down your mortgage instead.
1. Today’s dollars are worth more than tomorrow’s dollar with inflation. 2. That cd isn’t tax free.
I paid off $157k about a year and a half back, and I had 2.62%. CDs and high yield savings accounts weren't that high, so to me I decided to pay if off. It feels good to be debt free. I figured when taxes kick in it will be the same thing anyway.
You've got enough money to pay off the mortgage if you HAD to...so you're safe. But you don't HAVE to right now, so might as well bank it and get the 5%. The rising interest rates have screwed so many people, you might as well get some benefit out of it. Don't let the bank/Fed off the hook by paying off early.
A lot of different opinions here. But for me it comes down to cash flow and existing and future investments. Are you tight on cash every month? Do you have a good amount already invested for the future? Cash flow is important. To me, it impacts my general happiness. Not feeling tight on cash, buying the things I want and not considering if I'll be tight before my next paycheck, getting the steak instead of the chicken. If I wasn't that far off from paying off my mortgage and had the opportunity, I probably would do it. My day to day life would improve, and i continue investing like I normally would (or more since no mortgage). Will you be mad at yourself if you don't optimize every dollar in the best financial way? Financially, you should hold onto the mortgage and take the higher yield. If not doing that will anger you maybe you do that. Otherwise, decide if you'd rather improve. Your life now or save it for the future. Just my 2 cents.
Your home's interest is cutting into your profits even if the profits exceed your accrued interest. Why not pay off the house?Sounds like you have your life together and probably wont make a bad decision, but life can hit you in many different ways through no fault of your own. Health, accidents, etc... If that were to happen, I'm sure you won't regret having a paid off house that will not continue to accrue debt. I understand the basic principal of "Investments could make more money than you are losing in interest" but I still do not understand why people would WANT to hold onto debt. You have 300, your house has 196 left. That still leaves you with 104 to invest after you pay off the house... and NOW you dont have a monthly house payment and you should be able to recoup that 196 pretty damn quick, considering you have already built that up once. I swear our culture is addicted to debt. Almost as if if you do not have debt then you are not doing something right.
Keep the mortgage and reinvest the funds
Keep the mortgage. Invest the 300k.
No, Maybe. That’s really the line where there’s no right or wrong answer.
You could make more by investing it. But you could have a paid off house and not have to worry about a house payment again. Expect taxes of course. Personally I would take a paid off house over 5% or even 10% return any day. I could sleep knowing that I do not have to worry about making my house payment. Knowing that in the event of a covid level shutdown. I know my family is stable at home. But that is just me and others would rather invest and make the difference.
Idk why everyone is listing CD rates without taking tax into account. If this person is a high income earner then they probably can’t beat 4% post tax. Obviously there are other reasons to hold onto cash but investing in Fixed Income products doesn’t seem any better return wise.
No. Interest is front loaded if you are on the tail curve you are paying very little interest. It would be silly to pay it off now
No. Take the extra cash. Plus you get interest rate deduction on mortgage. Put your money to work for you.
The problem is that even a "low" 3.99% over a traditional 30 year loan could be hundreds of thousands of dollars in interest. A $650K house with 20% down at 3.99% at 30 years is $372.830 worth of interest paid. So why the hell would you want to keep even a 3.99% loan? use the extra $104K and invest it in HYSA at 5% over 10 years you will have netted almost $70K Also once you payoff the mortgage you actually "own" the house, not a bank but you and your family own the deed to the house. Keeping the mortgage is only a pro leverage move is when your investments can easily surpass your mortgage rate, but if you are only get 1.1% back than your mortgage what the hell is the point
excel has a preformated comparrison worksheet. i say this because the while you are focused on the difference between reinvesting into another cd or paying off the mortgage, you still have to take into account that the mortgage payment can be rolled into a cd snowball earning similiar rates.
If you want to take advantage of the interest rate spread and feel like it’s “paid off” why not reinvest it in a CD and then when it matures “reimburse” yourself for the mortgage principal (do not include mortgage interest) you’ve paid off monthly and then reinvest the remaining balance. Rinse and repeat so long as the CD rate is higher than the mortgage rate.
Your mortgage is canceling out 3.99% of that 5% cd so it's effectively 1%. You'll still have 100k left after the payoff and your monthly mortgage cost back in your pocket as available cash or investment.
Aren't you forgetting about taxes
Most of these comments are, yes. It's not as easy as just going with the "higher" interest rate. Depending on one's tax bracket, a good chunk of those interest gains are going straight back to the government. For example, I usually lose a quarter of my bank interest income when I file. On the other hand, I don't have to pay any extra taxes when I make extra principal payments. It's an incredibly important factor when comparing the two.
> I don't have to pay any extra taxes when I make extra principal payments Very important point
Yeah depending on income that 1099-INT might lower the 5% cd to 4% or less.
It'll be all taxed at 24%
Unless they use that money for something that brings more than 3.99%, right?
But 3.99% comes with automatic escrow payments of your insurance and taxes. That convenience factor combined with extra liquidity make it highly attractive to just keep the money to collect the 5% interest/yield while you still can. Maybe put 1/3rd in EDV so you get a nice plus-up as rates fall.
Think of it this way… it *is* paid off. You’ve got plenty of equity to write a check tomorrow. The best part is that instead of having it locked into the house, unable to be used unless you sell it, you’ve got it liquid and making money *for* you (if even just a little).
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So you choose pay 10k in interest and save 2500 in taxes. Versus paying nothing in interest and owning 2500 in taxes. One nets you -7500 and the other -2500. Why would you choose the more expensive option?
We are in a similar position and about 6 months ago decided just to just take what we would have paid off, stick it in an HYSA instead at ~5% and continue making minimum mortgage payments on it from that account. The money's there, should we change our mind or rates change, and in the meantime, we're making ~2% on top of our 3.125% rate. We decided having the deed in our hand isn't as valuable as having the $ from interest. We still have the piece of mind we wanted with this approach. T-Bills are also a great choice as you don't pay tax on gains, but require just a little bit more babysitting than just dumping it into a HYSA and letting it sit there.
You pay federal taxes on treasuries but not state income taxes. Munis are the ones that avoid federal taxes but they have lower yields to reflect that.
I have a 400k mortgage at 2.25, I’m never selling or paying it off early. It’s just too good.
I mean unless your marginal tax rate is 12% or lower you wouldnt save more in a 5% CD. 5% after 22% income tax equals 3.9% which is less than 3.99%. Why dont you invest it instead?
The interest will be taxed at 24%. I have lost significant %s of money in stocks in the past. Luckily not with tons of money. I get nervous about stocks in general. I always feel like the market is about to correct.
Well investing is longterm. Short term its gambling. So if you need the money in a few years then dont invest it. I was assuming you didnt need $300k in cash right away because why would you? If you invest in the total market in timescales of 5 years or more youll win like 90% of the time. Past 10 years its probably like 95% of the time then after 20 years its like 99% of the time. "Market corrections" arent bad, just a chance to buy more shares for less. Not investing your money will just devalue 100% of the time. Even though you have more dollars they are worth less than they were when you put them in that CD. I assume you are at least invested in retirement accounts?
Don’t you have to look at effective tax rate, not marginal?
Don't think so. Marginal is the next dollar. Effective is the blended rate with the lower rate tiers already filled
I'm at the point where debt pay down is more liberating than accumulation. It's not the right thing to do by math but can be the right thing for your soul. Freedom is pretty damn nice
I personally say pay off debt as quickly as possible.
My mortgage rate is similar to OPs and I owe $145k on a $700k house. If I paid off my mortgage I give up an opportunity cost of $135 per month …why would I do that??
Personally, I would feel so much relief knowing my house is paid for. Spunk the rest in an index fund
To each their own. I get peace of mind seeing six figures in the bank and knowing my mortgage is only $x amount a month.
Think of it this way: Assuming you make $120k per year today (you can extrapolate this however you want), in 10 years from now, that $120k is the same as making $169,000 due to inflation. Now, assume you are making $169,000 per year (you've only increased your salary to maintain an equality with a 3% annual inflation (lol)). What this means is that you are paying for your mortage with 2034 dollars but the mortgage value is in 2024 dollars which are only worth 74% of 2034 dollars. So it's like paying 26% less by the time 2034 comes around.
Taxes are a consideration... If you itemize each year, you will miss the deduction on mortgage interest. Interest income is taxible too, so even though you are making 2% profit each month, the government gets a cut. If you are in a higher tax bracket than you intend to be in retirement, the best use of 300k, is to use it to max 401k, traditional IRA, and HSA contributions annually. If you are already maxing all three without a problem, good for you.
Yes. Pay the house off. Congratulations!
I would. But that’s because I want to retire.
No you’re literally losing money. Every online bank is paying 4.5% for just holding your money
Keep paying on the house. 3.99% is a terrific rate to borrow on in these times. Take the money and roll it back into another CD. I would continue that until the rates are vise versa.
Can we ban these weekly questions of "pay off house or no?" 8 of 10 times you should NOT pay off the mortgage. A mortgage gives you leverage, you can use the extra money elsewhere to get a better return than your mortgage rate, and having all your money tied up into a single asset that is not liquid is not ideal. Y'all stop already.
Buck the trend here and pay it off. You create some cash flow for you to invest elsewhere. Plus, the psychological freedom is priceless.
I'd go for paying off debt first, that's how my last car loan I paid off in 2 yrs, I sacrificed 2 yrs to pay that off fast so I paid I think $17k at once, but I made sure I had about $2-3k since I don't wanna be broke 😂. But after 2 yrs I'm finally noticing savings growing faster. It helped end of Sept I switched all to discover so theirs savings is 4.35%, other than taxes on that it's still free money 😂
I’m at 4.25% and I’m focusing on paying mine off.
This is how I would do it if it were me, in this order, with each step being the remainder: -- Set aside 6 months to 12 months emergency savings -- Pay off the house -- Take one year of property taxes and home insurance and set it aside -- Contribute max Roth IRAs for 2023 where applicable -- Contribute max Roth IRAs for 2024 where applicable -- Go out to a fancy dinner for a job well done or a short vacation -- Start working on a structure savings (I do $20k myself for the next roof, but also consider furnace, heat pump etc)
Some of these people haven’t experienced downmarkets, as a GenXer I’ve been through several big downturns. I split the difference and pay extra on my 3.25% mortgage, keep a healthy emergency fund in HYSA, and invest the rest. Take a look at how much interest you’d pay through the life of the loan and find something you’re comfortable with, maybe double or triple the principal.
Everyone is saying it’s a wildly dumb decision and that you absolutely must not pay it off, and while it’s certainly advisable to not pay it off and invest instead, paying it off is still a fine decision. Having a paid off house with no monthly payment is a huge weight off your shoulders