Pay off mortgage in my situation?

[sergio]

Here's my situation:

Mortgage balance is $74,000. Home value is about $265,000. Monthly payment is $1450 for principal + interest. Loan is a 15-year @ 3.25%, with about 5.5 years left if we just make the minimum payments.

Our emergency fund is currently at about $75000 (14 months expenses including the mortgage payment).

We also have $52,000 in a taxable account. If I liquidate the entire taxable account, we will pay no federal taxes since we have about $10k gains in the 0% LTCG bracket. State tax would be 6%.

I've been pondering liquidating the $52k in taxable to lock in the gains at record high values, and taking another $20k out of the emergency fund to pay off the mortgage. That would still leave at least 12 months expenses since we don't need to cover a mortgage anymore.

The reason why I am thinking about this is:

- Stocks are at all time highs. I'd be selling at a high with little taxes.
- The $75k emergency fund cash is earning basically nothing right now. Paying off the mortgage saves $6k in interest over the 5.5 years remaining on the loan. We'd be able to reduce this to $50k and then replenish the taxable account with the money used for our mortgage. Yes, it sucks to pay some taxes but at the same time, this should reduce taxes in the future as the basis will be higher.
- We've decided that we'll probably be staying in this house for at least 3-5 more years.

Anyone have any thoughts or reasons why I'd be making a huge mistake? Thanks!

 

[pacergal]

If it were me, and I was only going to be in the house another 3-5 years, NO, don't pay off the mortgage. It's a good low rate.
If it was my forever home, possibly a good idea.

 

[Montecfo]

Are you able to itemize deductions for taxes? Or not?

Generally I think it is good to have a mortgage in this low rate environment. But hard to argue with your logic and you seem to have a pretty robust emergency fund.

Notice you will only save 3 years of interest if you are there 3 years.

If you do this I would recommend a standby HELOC as a backstop in case you need to tap home equity.

 

[sergio]

Are you able to itemize deductions for taxes? Or not?

Generally I think it is good to have a mortgage in this low rate environment. But hard to argue with your logic and you seem to have a pretty robust emergency fund.

Notice you will only save 3 years of interest if you are there 3 years.

If you do this I would recommend a standby HELOC as a backstop in case you need to tap home equity.

Nope - we take the standard deduction. I agree that a loan at 3.25% isn't a big deal, but at the same time it means that I'm not really earning anything on the money unless I plow more money into stocks.

Good suggestion on the HELOC!

 

[JRon]

Yes I would pay the mortgage off in your situation. In fact we were in a similar situation years ago and made the decision to pay off the mortgage - have always been happy that we did that.

 

[pb4uski]

I would probably use the emergency fund to pay off the mortgage since you are currently earning peanuts and paying 3.25% and then use the freed up cash flow to replenish the emergency fund over time. Then the taxable account becomes the emergency fund while the emergency fund get replenished.

Whether or not to divest of stocks is a separate decision and who knows what will happen but I agree stocks are currently fully valued. By using the emergency fund rather than the taxable account to pay off the mortgage you can sell part of the taxable account if you wish to to manage your taxes.

HELOC as a backstop is a good idea as long as the HELOC is no or low cost.

 

[Montecfo]

Nope - we take the standard deduction. I agree that a loan at 3.25% isn't a big deal, but at the same time it means that I'm not really earning anything on the money unless I plow more money into stocks.

Good suggestion on the HELOC!

Since you are not itemizing, the case for payoff is more compelling. 4-5% guaranteed return.

 

[FIREHAPPY]

I paid off my mortgage while in my early 40s. A lot of folks advised me to take the money and invest in the market, but for me, it was more about peace of mind. I took the money I'd normally use to pay the mortgage and invested monthly in a low cost fund. Slow and steady investing worked for me over the years. No regrets.

 

[cyber888]

I found the solution to this. I got a 2.24% first-lien HELOC as Feds promised low rate till 2023, and terminated my traditional mortgage. My HELOC is -1.01% below prime. I have a $450K home and have $86K debt in my HELOC balance. So, my HELOC is only less than 20% of my home value. I'm paying $320/mo (not including realty tax and insurance which is $347/mo). In essence, it's about $667/mo for my house. My emergency cash is $90K. I also have after-tax stocks. I'm thinking of paying the HELOC balance aggressively, knowing that in case of real emergencies - I can just write a check and take money out of my HELOC. Heck, I could pay my entire $86k balance with my cash and after-tax stock funds, knowing that I could get that money back easily if I really need it.

Here's my situation:

Mortgage balance is $74,000. Home value is about $265,000. Monthly payment is $1450 for principal + interest. Loan is a 15-year @ 3.25%, with about 5.5 years left if we just make the minimum payments.

Our emergency fund is currently at about $75000 (14 months expenses including the mortgage payment).

We also have $52,000 in a taxable account. If I liquidate the entire taxable account, we will pay no federal taxes since we have about $10k gains in the 0% LTCG bracket. State tax would be 6%.

I've been pondering liquidating the $52k in taxable to lock in the gains at record high values, and taking another $20k out of the emergency fund to pay off the mortgage. That would still leave at least 12 months expenses since we don't need to cover a mortgage anymore.

The reason why I am thinking about this is:

- Stocks are at all time highs. I'd be selling at a high with little taxes.
- The $75k emergency fund cash is earning basically nothing right now. Paying off the mortgage saves $6k in interest over the 5.5 years remaining on the loan. We'd be able to reduce this to $50k and then replenish the taxable account with the money used for our mortgage. Yes, it sucks to pay some taxes but at the same time, this should reduce taxes in the future as the basis will be higher.
- We've decided that we'll probably be staying in this house for at least 3-5 more years.

Anyone have any thoughts or reasons why I'd be making a huge mistake? Thanks!

 

[sergio]

I would probably use the emergency fund to pay off the mortgage since you are currently earning peanuts and paying 3.25% and then use the freed up cash flow to replenish the emergency fund over time. Then the taxable account becomes the emergency fund while the emergency fund get replenished.

Whether or not to divest of stocks is a separate decision and who knows what will happen but I agree stocks are currently fully valued. By using the emergency fund rather than the taxable account to pay off the mortgage you can sell part of the taxable account if you wish to to manage your taxes.

HELOC as a backstop is a good idea as long as the HELOC is no or low cost.

Interesting suggestion! I'd probably still sell a small amount of the taxable (e.g. $15k) just to hedge a bit against a simultaneous market crash and job loss right after paying off the house. We also do have other sources of cash (e.g. Roth principal) that we could tap in a life-or-death situation, and about $50k in HSAs, so I think we could make this idea work. I'm adding it on the list of possibilities!

 

[Animorph]

+1 to pb4uski's plan.

Usually I'd prefer to keep a 3.25% loan and invest in the normal portfolio AA. But with the pay-off money sitting in cash the 3.25% is not a bad return. And the 5.5 year duration is not optimal for long-term investing but not too bad for cash.