Pay off Mortgage?

[natetheb]

A bit of background before I get to my actual question. First, married with 2 and soon to be 3 kids. We have been living in our house for nearly 7 years and been paying extra the entire time. Due to a recent windfall in the form of a sandbox vacation + double dipping, our financial situation has taken bounds forward. Due to the previous mentioned windfall still helping (i.e huge incoming tax refund) and now even more COVID money just hitting the bank, this is starting to drive a question to the forefront of my mind. Here is the breakdown of where we are at financially:


- We have decently funded 529s for 2 kids + GI Bill.
- Our $155K initial mortgage (3.375%) now sits at $64K (payment + extra = $1286/mo).
- We have $86K in a taxable account, with $48K in two bond funds (VBTLX, VWITX).
- We should be getting a $9100 (Fed + State) refund in a matter of weeks.
- $5600 COVID check just hit the bank.


We are trying to save up for a large land purchase ($200k-$350k). Unfortunately, it would be challenging to cash flow two mortgages, hence why we started a taxable account. Also, land prices have unreasonably (unreasonable because there is a lot of open farm land around here) skyrocketed around where we are looking, so it may be another year or two before we find what we want to buy. Our bond funds are not really making much and are actually turning slightly negative. Even the 5yr & 10yr returns sit at around 3.5%. Does it make sense to cash out those bond funds and use the extra windfall cash (refund + COVID payment) to pay off the mortgage this year? Are there other opinions or better ideas?

 

[pacergal]

Do you have other retirement accounts? that would make a difference in decision for me

 

[natetheb]

Do you have other retirement accounts? that would make a difference in decision for me

Yes. IRAs + TSPs = $243K. Additionally, I will (eventually) qualify for 2 pensions that should total around $5k+/month.

 

[anothercog]

I would suggest trying to refinance your house for a lower rate and then save more cash for the land purchase as the land purchase will undoubtedly have a higher interest rate.

 

[SnowballCamper]

Our bond funds are not really making much and are actually turning slightly negative. Even the 5yr & 10yr returns sit at around 3.5%. Does it make sense to cash out those bond funds and use the extra windfall cash (refund + COVID payment) to pay off the mortgage this year? Are there other opinions or better ideas?

Generally the numerically optimal thing to do is keep the mortgage and invest according to your asset allocation. I prefer not having the mortgage, so we've been happy with the mortgage paid off.

The future pension's are kinda like a bond allocation for the portfolio, but the question is are you vested in them yet?

IF yes, then I would surely sell the bond funds and pay down the mortgage. But not because this is optimal, but because I hate paying interest.

 

[natetheb]

The future pension's are kinda like a bond allocation for the portfolio, but the question is are you vested in them yet?

I will with time. 6 more years for my military pension. I am already vested in my Federal pension, but I don't plan on retiring from my Federal job for many many years.

 

[38Chevy454]

I would at least get out of the bond funds and into something with better returns *if* you are not going to put it to use immediately. With prospect of rates increasing at some point (due to inflation, gov't free for all spending not helping), the bond funds are going to have tough time and could decrease in value.


On the current house, I like the idea to refi at lower rate and possibly 10 or 15 year term. Just pay the std amount of the new mortgage payment. Then pay yourself into after tax savings to increase cash for that future land purchase. I assume to build a house on? Why not just buy an existing house on some acreage when you sell current house?


The big question is what to invest in for those bond funds, tax refund, and stimulus monies. It is a question of timeframe. If you plan to make the move in 2 years or less, stay conservative. If longer than 2 years, then I think you can get more aggressive. Just beware that you want to invest and forget, don't panic if stocks take a downturn. Just keep putting money in (paragraph 2 above). Unless something never seen before, any downturn will recover within approx 2 years time.


If you want, it might be good to start a Roth IRA and fund that with some money instead of the regular after tax account. As the rule of compounding goes, the more you put in and the earlier you put it in, the better the return in the end. Roth being tax free, will not affect your tax liability from pensions.

 

[pb4uski]

The downside of paying off the mortgage is that if you have some sort of financial emergency then you'll have $64k less to help with that emergency... or better put $64k less the $1,286/month additional that you will presumably save and add to taxable accounts once the mortgage is gone.

If your job is secure, I would liquidate the $48k of bond funds and steer your $9k tax refund and $6k stimulus payment and pay off the mortgage... you'll avoid paying 3.375% and you can replenish the taxable account by diverting the $1,286/month that you would have spent on mortgage payments to taxable savings. Also, once you payoff the house you could take out a HELOC for financial flexibility.

As an aside, $200-350k for a land purchase seems outrageous... from what you've posted that land alone would be a huge percentage of your net worth... and what it land prices end up dropping as quickly as they have risen recently? You would get hosed and a lot of your hard earned wealth would evaporate. Very risky to put so many of your eggs into one basket IMO.

 

[Vacation4us]

I would pay off the mortgage and redirect the payment to your savings for any future purchase.

I doubt you could refi a 64k mortgage but I also don’t live in an area where a 155k house is available so YMMV.

My grandfather paid off his first mortgage in a few years and built great wealth over his VA career of 30 years. It was always my goal to have a paid off house. I do but it took me until I was 53 and I retired at 54.

Imagine the wealth you could build not having a payment for where you live. You would be so far ahead of the game!

My opinion pay it off!

 

[Out of Steam]

I would suggest trying to refinance your house for a lower rate and then save more cash for the land purchase as the land purchase will undoubtedly have a higher interest rate.

Unless OP goes with a 15 year mortgage, increasing rates don't leave a lot of room for refinancing at a lower rate. Unless they want cash-out to buy land, they will have paid the house off before they recover the closing costs.

 

[natetheb]

If your job is secure, I would liquidate the $48k of bond funds and steer your $9k tax refund and $6k stimulus payment and pay off the mortgage... you'll avoid paying 3.375% and you can replenish the taxable account by diverting the $1,286/month that you would have spent on mortgage payments to taxable savings. Also, once you payoff the house you could take out a HELOC for financial flexibility.

Federal employee + National Guardsman. Quite secure and can easily volunteer for a 120 day temp stint (CONUS) or another sandbox vacation if things get real tight (my military career field is in high demand CONUS and OCONUS). Wife is a stay-at-home mom.

As an aside, $200-350k for a land purchase seems outrageous... from what you've posted that land alone would be a huge percentage of your net worth... and what it land prices end up dropping as quickly as they have risen recently? You would get hosed and a lot of your hard earned wealth would evaporate. Very risky to put so many of your eggs into one basket IMO.

Agreed. Land prices are peaking around $20k/acre and we want around 10-20 acres. 5 years ago land was under $10k/acre. I kind of hope for a recession and land will be a bit cheaper.

I doubt you could refi a 64k mortgage but I also don’t live in an area where a 155k house is available so YMMV.

We put $40k down. House now appraises for around $230k. A nearly identical sized house in our small neighborhood sold for $270k and was still builder grade, whereas we are doing some upgrades ourselves.

 

[armor99]

This is a tough one.... I think it is all about your tolerance for risk. No one knows the future. Jobs come and go, and sometimes life happens in unexpected ways, both to the bad and the good.
If something unexpected were to happen, you would probably want a paid off home. If everything works out with no “hiccups” you will look like a genius for NOT paying off your house.
For myself, I tend to be more defensive in my thinking. Then again, I have been through 2 layoffs in my career, so that has certainly flavored my thinking. These are my thoughts, do not think there is a real right or wrong answer.. hope this helps...

 

[Ready]

What are you planning on doing with the land? Will it produce income? If so, how soon?

 

[teetee]

Generally the numerically optimal thing to do is keep the mortgage and invest according to your asset allocation. I prefer not having the mortgage, so we've been happy with the mortgage paid off.
.

It would only be optimal if the economy doesn't tank and stock market does go belly up and they had to ride it with bearly enough money to pay for their living cost and monthly mortgage payment.

There is no general optimal method when the level of future risk is unknown. The safest method is to own no money to anyone.

 

[Aerides]

With such a small mortgage and payment, I'd look at what it does overall to your after tax income, how it fits in with other bills, and what it would mean to free up that monthly cash - where would that go and what would that do for your long term, etc. I'm not sure a refi is viable for such a small balance, once fees are added, but can't hurt to look.

I like the idea of a heloc for flexibility if you do pay it off, as a buffer for emergency funds.

 

[YVRRocketSurgery]

I like the idea of a heloc for flexibility if you do pay it off, as a buffer for emergency funds.

+1

 

[natetheb]

What are you planning on doing with the land? Will it produce income? If so, how soon?

Dabble in some homesteading. I have no desire to produce a major stream of job replacing income. If we can offset a majority of our food costs and make a few extra bucks on the top, I will call that a win.

 

[beernutzbob]

Paying off a mortgage is both a financial and an emotional decision. I had the opportunity to do it or not last year and emotion pushed me to do it when it might not even have been a wash situation financially.

In my case I sold some bond mutual funds returning between 2-3% and paid off a 4.5% mortgage on a second home which had 27 years remaining. If I'd instead reinvested the proceeds of the bond funds last year in a total market index fund I'd likely have been able to pay off the mortgage today and still have 50% of the total market index funds. Que sera...

OTOH, paying it off felt FANTASTIC.

 

[armor99]

A bit of background before I get to my actual question. First, married with 2 and soon to be 3 kids. We have been living in our house for nearly 7 years and been paying extra the entire time. Due to a recent windfall in the form of a sandbox vacation + double dipping, our financial situation has taken bounds forward. Due to the previous mentioned windfall still helping (i.e huge incoming tax refund) and now even more COVID money just hitting the bank, this is starting to drive a question to the forefront of my mind. Here is the breakdown of where we are at financially:


- We have decently funded 529s for 2 kids + GI Bill.
- Our $155K initial mortgage (3.375%) now sits at $64K (payment + extra = $1286/mo).
- We have $86K in a taxable account, with $48K in two bond funds (VBTLX, VWITX).
- We should be getting a $9100 (Fed + State) refund in a matter of weeks.
- $5600 COVID check just hit the bank.


We are trying to save up for a large land purchase ($200k-$350k). Unfortunately, it would be challenging to cash flow two mortgages, hence why we started a taxable account. Also, land prices have unreasonably (unreasonable because there is a lot of open farm land around here) skyrocketed around where we are looking, so it may be another year or two before we find what we want to buy. Our bond funds are not really making much and are actually turning slightly negative. Even the 5yr & 10yr returns sit at around 3.5%. Does it make sense to cash out those bond funds and use the extra windfall cash (refund + COVID payment) to pay off the mortgage this year? Are there other opinions or better ideas?

Always factor in “risk” to your calculations. As someone that has been through 2 layoffs, this is a thing for me. If I lost my job unexpectedly, would I rather have extra land, or a paid off home to live in? From that point of view it makes sense to me, even though mathematically, it might make more sense to go in another direction.
I am now 3 months away from paying off my mortgage and being 100% debt free.
That means I will have almost $2k a month extra EVERY MONTH! It will pile up in no time at that rate. That is peace of mind that no math equation can show.