Market high-would you pay off mortgage?

[Luvdogs]

I'm thinking of pulling the trigger on the mortgage. Our stocks/mutual funds/ETFs, etc are up about 80K since the beginning of the year. Mortgage balance is 70K.

I was thinking of taking 30K from my 401K which I would have to pay tax on (and net about 20K) and 50K from from Roth/taxable accounts (previously paid tax on).

But I've been told to let the Roth/taxable accounts ride as long as possible so they will continue to grow tax free.

Our income will increase once DH retires and we start withdrawing from our 401K/IRAs and get SS in addition to our pensions. So we will likely owe more taxes in the future.

Too bad they didn't have Roth IRAs back in the day as most of our $ is tied up in regular 401Ks/IRAs.

Is that a reasonable combination of taxable/non-taxable or any other ideas?

I've been a lurker for about a year but this is my first post here!
Thanks!

 

[ERD50]

If you have a defined AA (Asset Allocation), you might want to re-balance.

If your mortgage is a low rate, I'm not a fan of paying it off early, but I guess I could see it as part of a rebalancing strategy, if that suits you.

But I would not pay taxes on the withdrawal to pay down the mortgage! For your $30K, you get to reduce your mortgage by 20K? That does not sound attractive at all - in fact it sounds downright UGLY!

-ERD50

 

[ProspectiveBum]

But I would not pay taxes on the withdrawal to pay down the mortgage! For your $30K, you get to reduce your mortgage by 20K? That does not sound attractive at all - in fact it sounds downright UGLY!



-ERD50

+1

I get that it can be appealing to pay off the mortgage, but from a straight numbers perspective, this approach doesn't make financial sense to me at all.

 

[Luvdogs]

OK, thanks. I could take it all from accounts that were previously taxed but wasn't sure the best way to divvy it up.

Someday I'll have to pay taxes on it.

It's just that the last six weeks has been so easy to make money, I don't want to lose it. It is basically rebalancing a portion of it.

 

[Meadbh]

Welcome to the forum. You don't state your mortgage interest rate. If it's "high", it might be a good time to take some equity investments off the table and pay it down. However, it seems foolish to pay taxes to do so.

 

[REWahoo]

OP, the "pay off the mortgage early" question is a topic of never ending discussion. I'll save you some time and do a short summary of the responses you have - and will continue - to see:

No

Yes

Maybe

Rinse and repeat...

 

[target2019]

Compromise. Pay next month's principal in addition to this month's payment. You are done in half the time.

 

[jollystomper]

A lot depends on your monthly payment and interest. My mortgage is $69K, the interest rate is 2.875%, and the monthly payment is $616. I have more than enough to pay it off, but at that low rate and payment I can easily manage it and use the $69K for other purposes.

 

[ducky911]

I would not pay taxes to pull money out. I would though put future money to paying off the loan as I went forward. Of course always keeping enough on the side.

 

[Luvdogs]

It's an adjustable, current rate 3.25 and will reset in the summer to about 4%. I've been paying an additional $400 per month.

It's just that the last six weeks (actually three months) has been such easy money, I would not want to see it evaporate in a market turndown.

Of course I could rebalance some of it but at least with paying it off I have a "sure thing."

I know there's a lot of controversy about whether to pay it off or not; that's why I'm on the fence.

 

[Marita40]

I thought fleetingly about doing the same but have decided to just stay the course. I have $56,000. left at a not so great fixed rate of 4.1. However, with the extra I'm paying each month it will be paid off in about 4 years.

 

[panacea]

OP, the "pay off the mortgage early" question is a topic of never ending discussion. I'll save you some time and do a short summary of the responses you have - and will continue - to see:

Rinse and repeat...

So true.

My opinion is that it's a tax issue, an investment returns issue and a risk tolerance issue.

What's your current tax bracket? Will it be higher or lower in future years? Would you jump into a higher bracket this year if you took out a large lump sum from your pre-tax accounts? Not ideal.

Would you expect your investments to generate a return higher than your after-tax mortgage rate? I would base this decision on your maturity date. In other words, if your last payment is scheduled for 4 years from now I'd pay off the mortgage because you could have way more than you current have... or way less if the stock market is uncooperative. If your time horizon is say, greater than 10 years and your mortgage rate is 3%, a balanced portfolio should be able to beat that pretty easy (of course not guaranteed).

Really low risk tolerance and you hate debt? Might make you feel better to pay off the debt regardless of all the above.

Based on what you've said so far, I personally wouldn't take money from your investments to pay off your mortgage.

 

[panacea]

just saw your post on the 4% rate adjustment. A little tougher decision perhaps but still wouldn't do it if the time horizon is long and you'd have to pay taxes on the withdrawal.

 

[pb4uski]

I think it would be foolish to redeem $30k pay $10 to the government and use the remaining $20 to pay down the mortgage... the ~33% tax cost is too high.

I also don't favor using Roth money... let that continue to grow tax-free.

If you will feel better redeeming some taxable account money and use the proceeds to pay down your mortgage that would be ok as long as the tax cost isn't too high.

YMMV... my 2 cents.

 

[COcheesehead]

I wouldn't take money out of investments that will trigger taxes and penalties to pay it off. Too much is not known about your situation though. The mortgage deduction could also be the basis of allowing you to itemize and get further tax deductions. Will you repay yourself? Are you planning to move? What is the RE market like by you?
The one lesson here is that you could have refi'd to a fixed at about or nearly about the same interest rate. That loan would have looked pretty nice in a few years with rising rates.

 

[Done]

I have a much higher mortgage at a low fixed rate but was wondering the same. Would I be kicking myself in a few months if I let the investments ride and then there were a downturn? How would I feel if I paid off the mortgage and then the market continued breaking records? The calculators predict that I will have greater assets over time by keeping the mortgage, but I am tempted by the notion of having zero debt.

I decided to keep the mortgage for a few reasons:
- My withdrawal rate already accounts for this spending, and I'm happy with my withdrawal rate.
- The mortgage interest allows me to itemize (even with the proposed larger standard deduction) and I'm expecting my tax rate to increase in the future.
- There's a chance that I may downsize in several years, so why tie up money in equity that will only be refunded?

Your situation may differ but these are the factors I considered. Please let us know what you decide.

 

[Red Badger]

My situation almost identical to JollyStomper:
$69K balance
3.375% fixed
Payment well within my pre and post retirement budget
Retire date 6-30-17
Not logical reason to incur tax burden to pay off mortgage

From all the other posts here, seems obvious that the only case for early payoff is that you would sleep better. While that might seem costly to most of us, it does not make it wrong.

Last comment, if the market goes south, you only "lose" if you pull the money out. As long as you let it ride, it will recover and then some - the market ALWAYS does.
Good luck!

 

[brucethebroker]

I thought fleetingly about doing the same but have decided to just stay the course. I have $56,000. left at a not so great fixed rate of 4.1. However, with the extra I'm paying each month it will be paid off in about 4 years.

I have to smile while thinking about your "not so great fixed rate of 4.1%". I am reminded of getting 9.9 fixed in 1986 and being SOOO thankful that it wasn't 11-12%. I honestly did not think we would ever have rates under 10% again......

 

[brucethebroker]

OP, we took some IRA money out to pay kid's tuition (bypassing early WD penalties) about 7 months before the tech crash in summer of '99. Figured we were taking some profits off the table but never dreamed of the coming crash. Sometimes it's better to be lucky than good.....

DW and I have never regretted it.

 

[Montecfo]

I think it is two decisions.

1. Take some money out of the market. Not a bad idea if you have a short time horizon. But rebalance and go forward if you have a longterm horizon.

2. Use funds to payoff mortgage? Could make sense if you have low-yielding funds, since you get a guaranteed return from payoff of interest-bearing loans. There are no 4.1% cds out there. Could help you sleep at night. Would depend on your investment returns also. If you tend to sell investments ater a market decline, you would likely do better financially to pay off the mortgage.

At all times you want to maintain adequate emergency funds of course.

 

[Andre1969]

I think a lot of it just depends on the terms of the mortgage, how much you have saved up, the cost of liquidating assets to pay it off (taxes, etc), and most importantly, your comfort level.

In my case, I've been doing a bit of a compromise. In a month that the market does really well, I'll throw some more at the principal. In most cases, I've just been pulling that money out of a money market account, so tax implications are minimal. But, when I've had to replenish the MM account, whatever would get sold off would be at the long term capital gain rate, so taxes aren't too bad.

I guess you could still argue that paying ~22.5% (15% LTCG plus ~7.5% state/local taxes) to pay down 4.99% isn't the most efficient use of resources. But, I'm going for a bit of that peace-of-mind. Although in my case, that peace-of-mind comes, not necessarily, from having the mortgage paid in full right away, but knowing that it's getting down to a manageable amount. FWIW, the starting balance in February 2015 was around $174K. I'm down to around $123K now. The original payoff would have been in January 2025, but I have that moved up to January 2023. If February finishes off being a "good" month, I'm planning on paying another big chunk, which should move that up to August 2022.

 

[CRLLS]

I struggle with this decision too, we have 100k outstanding on a higher interest rate loan. We can take out money from our accounts and pay it off and pay taxes on it. I am currently looking at it as what would that 120K extra in my account get me? At a 3%WR, (my plan) that would be an extra $300 per month. Since the alternative is paying the monthly mortgage at $570 per mo for the next 24 yrs or so, I'm thinking it might make sense. Since I don't get the benefit of itemizing my taxes there is no offsetting benefit that way. I know I can do a more detailed analysis, but either way I go, there is no real hurt.

 

[IMATERP]

My wife and I just paid our mortgage off in December 2016.

We bought our retirement home in September 2014 and financed $50K (15 yr @ 2.875) as we rolled the principal from the sale of our old house into our new house. It was our intention to keep the mortgage for 5 years. Anyway, after two years, I had a CD due (and this in conjunction with my desire to retire in a year or so) led me to the conclusion of Just paying off the balance.

You see, my decision wasn't about selling stock but was it better for me to pay off our loan instead of rolling the money into another CD?

The House Won! Did you know that the House always WINS ?

Anyway, in all seriousness - my wife and I just wanted to have the mortgage paid off before we retired - and were essentially good to go.

Michael

 

[nash031]

Doesn't seem like the worst idea in the world, but I think it probably depends on your horizon. If you're close to retirement and thus less concerned with long-term growth/accumulation, then I'd say do it. If you're further from retirement or require more long term growth, don't do it. You're locking in that "return" by paying down your mortgage, and the market will beat that in the future... eventually (or shortly! Who knows?) You're also paying dollars that are more valuable today rather than dollars that are most likely devalued tomorrow. This last part is why I don't pay down mortgages as a rule, though it would be tempting to kill one off right now if I were in such a position.

That said, I would NOT incur a taxable event to do this. Not in a million years.

 

[HadEnuff]

OP, I can tell you that I faced the same decision at one point. I opted to pay off the mortgage. However, not too long after that I needed to borrow some money to make some improvements and had to go through the process, and paying origination fees etc.
I am now carrying about 100K at 2.75 % fixed, for 12 more years. I could pay it off, but I pay the interest as a cost for keeping the flexibility of cash around.
As it turns out, now I am using that cash to keep MAGI down to remain eligible for ACA subsidies. It's a stupid system, but I did not invent it.

So, keep in mind that having cash can be useful.