Pay down the mortgage (fund 529 later) or Fund 529 now? Math problem.

[bo_knows]

30, married, first child is 6 weeks old at this point.

We have a $290k mortgage on a house worth ~$390k. I've been looking at possibly refinancing into a 20yr 3.5% loan with my credit union.

I ran a couple of scenarios and am confused at how this math is working out.

• Scenario 1: Start putting $4800 yearly into a 529 plan for junior. Pay down mortgage at the current rate (we're not putting much extra toward it)
• Scenario 2: Take that $4800 yearly, and put it toward the mortgage instead. Then, when the mortgage is paid off, use the $2200/mo we had been paying on a mortgage to fund a 529.

Assuming an average rate of return of 5% (somewhat irrelevant here), I Came up with Scenario 1 having a 529 balance of $141k by junior's 20th birthday, and a paid off mortgage. Scenario 2 has me paying off the mortgage in Dec 2025, and from then on out contributing $26800/yr to a 529.. with an ending balance of 188k and a long gone mortgage.

If I'm spending the same amount of money on both of these "investments", and I'm assuming a rate of return of 5% in the 529, why does it seem better to pay down debt at a rate of 3.5% first?

Might be a hard sell on the wife to focus on the mortgage instead of the 529 for 12 years.

Edit: Some other realities that I didn't add to the scenarios, for simplicity: My wife is currently working on 60% salary to stay home with the child for most of the week (eliminating child care), and the plan is to perhaps have another child and she'd go back to full-time 8 years from now. So, in theory, more income then... also another 529. Also, these scenarios do not even include the fact that my wife gets a yearly bonus (20-25% of her salary), which we could toss at a mortgage. Also, we had a "2nd mortgage" with her parents who have generously given us a cheap loan. This will be gone in 4 years, freeing up $400/mo.

For the simplicity of this exercise though, I just want to understand if it's better to dive at the mortgage, unless you're seeing 9% gains in the 529.

[rodi]

I can't tell you the best mathematical solution, just the way we approached it.

I have a couple of once a year cash sources. (Bonus, used to have ESPP cycles, and an RMD from an inherited IRA). I use this once a year money to fund once a year expenses: property taxes, auto and homeowners insurance, and the kids 529's. I've been tossing $5k/kid in each year and plan to do so till I have enough saved or they're graduated. (And plan to retire before this.) So my firecalc inputs include an extra 10K of spending till the youngest is 22.

I would use your wife's bonus to fund the 529's. Since bonuses aren't guaranteed, this seems like a good, goal oriented, use of the money.