Selling Stocks to Pay off Home Earlier ?

[atfourty]

Hi,
With Stock Market at all time highs, i have been thinking about selling some of my mutual funds/stocks to pay off the house early. I would sell only mutual funds/shares for which i would incur long-term capital gains tax.

I owe about 158K in the home. I need to raise about 80K from the stock market ( the remaining would come from my cash, currently have 90K).

I am 32 , married with a 4-month old baby; house-hold income 155k/yr (gross). Have about 300K in investments ( non-retirement + retirement). I would not touch the 401(K) portion for the investments, only non-retirement & roth ira.

What do you guys think ? After paying off the house, i would save $800/month in house payment.

 

[audreyh1]

I wouldn't do it until you had a LOT more than that in investments and cash. Do you have a nice low mortgage interest rate?

 

[karluk]

None of us can tell you whether this move will pay off financially - that would require an accurate prediction of whether your future stock market profits will be higher or lower than the interest you would save on your mortgage.

The one thing we can be certain of is that you will be losing an extremely valuable tax shelter if you withdraw money from your Roth IRA. That alone should be enough to quash this portion of your plan. If you really feel the need to cash in profits and reduce your stock exposure, you should limit yourself to selling taxable investments only.

 

[Fermion]

While not actually selling stocks, I am putting all extra money and dividends into paying off our 3.625% loan. We don't itemize and it is very hard to get a 2 year 3.625% tax free return.

 

[papadad111]

What interest rate is your mortgage. How many year term? Arm or conventional loan ? What tax bracket are you in ? How much is the house worth....

It's a simple math calc to determine your effective after tax cost of money on the loan vs possible after tax gain in stock market ( short and long term can both be considered). That said .....

Being debt free is liberating. Psychologically

Having a paid off house with a new baby will give you and especially your wife (it's a woman thing - want a secure nest they do). It will give u an extra bit of security at a nice time in your lives. Also psychologically liberating.

I delayed paying out house off for years in order to built up a larger stock nest egg - I wish I had just paid the house off. Simplify life. The ups and downs were painful between 2000 and 2008/2009 and a paid off house would have been nice in the downturn simply for basic survival piece of mind.

Plan b .... If your mortgage rate is high why not pay a big chunk of your cash toward the note, do a refi to lock in great historic old rates for 10 or 15 years ? You have enough equity to do that I bet and that avoids withdraws from Roth and gets you paid off sooner with big interest savings.
...

 

[atfourty]

i have 4%, 30 year fixed rate. Also, i am not sure what to with the 90 K in cash, if i don't apply it towards the mortgage. i am in 28% tax bracket

 

[atfourty]

While not actually selling stocks, I am putting all extra money and dividends into paying off our 3.625% loan. We don't itemize and it is very hard to get a 2 year 3.625% tax free return.

Could you please explain this further ? I am not sure if i follow it completly.

 

[LOL!]

After paying off the house, i would save $800/month in house payment.

I'm laughing at that. You would have spent $158K to save $800/month. How many months of saving $800 a month would get you back up to $158,000?

Anyways, there's nothing wrong with taking big gains in the stock market and paying off the mortgage. But think about it: You made those big gains because you invested in the stock market and didn't use that money as it was coming in to pay down your low-interest-rate mortgage.

 

[Cobra9777]

I wouldn't sell stock to pay off the mortgage. You're young and off to a great start investing. Let it keep growing. However, using idle cash immediately, plus future disposable cash to accelerate, would be high on my list for your situation.

 

[Ready]

I would stick to your target AA. If you intend to keep 70% in equities, but due to a market run up, you find yourself closer to 80%, you could rebalance, but use some of the rebalancing money to pay down the mortgage. But, as LOL said, paying $158K to save $800/month doesn't sound like such a great deal.

 

[papadad111]

i have 4%, 30 year fixed rate. Also, i am not sure what to with the 90 K in cash, if i don't apply it towards the mortgage. i am in 28% tax bracket

Set aside 3 to 6 months in cash as an emergency fund. Keep it in short term money market not the stock market.

Your effective after tax cost of money is about 2.9 percent per year which is what you would eliminate by paying off the mortgage.. Or about $4500/year in interest paid to the bank.

Your rate is low enough that it's not worth a refinance presuming you have 20 or more years of your 30 year term remaining.

Can probably do better by investing the money and earning more than 4500 per year on that money.... but it's not a guarantee every year.

Do you need cash on hand for a possible business venture ? Other real estate investment ? Kids school?

Flip a coin. I like to be debt free, now that I am there ....it's really cool. Before I was debt free I took the school of thought that the house note is cheap money, stock market returns are higher, etc. Also saw more than a few people lose their jobs over the past 5 years. Lose their house to the bank in foreclosure and that tipped the scale for me to get house paid off and own something free and clear for the family in case seething happened to me. Again it's just piece of mind ....

 

[samclem]

While not actually selling stocks, I am putting all extra money and dividends into paying off our 3.625% loan. We don't itemize and it is very hard to get a 2 year 3.625% tax free return.

When interest rates return to normal levels, and when we get a return to normal (or, IMO more likely higher) levels of inflation, a mortgage at 3 or 4% fixed will look like a terrific bargain. Every year that inflation exceeds that amount the holder of the mortgage actually makes money, because he will be paying the loan off with dollars that are worth less. And every dollar paid off now is one he won't have working for him at that point, and one that isn't in another investment earning better returns.

Unless a person has a very short term mortgage/loan, it makes sense to think long term. Nothing is guaranteed (including the advisability of paying down a mortgage), but on average the equity markets have provided much better than 3-4% returns.

 

[clifp]

I think it is important to separate the financial decision from the emotional, psychological factors.

Taxes are significant factor in figuring out if I should pay off my mortgage. There are many factors involved especially with respect to being able to itemize deductions.
You really need to get your favorite tax program Turbo tax or whatever and figure out how much after tax money the mortgage is costing you.

It is possible that it is costing you the full 4%, but it is equally possible that if you are in the 28% federal bracket and 5% New Mexico tax that after tax interest that your only pay 2.67% interest (1-(.28+.05)) * 4%.

You also need to look at the impact of selling 80K worth of stock. I looks like you well owe 16K (15% Fed +5% state) of tax on the shares, but there maybe other tax implications.

Once you have done all these calculation then you need to decide if a you expect the after tax return of your investment to out perform the after tax cost of your money. It is entirely possible that you decide you'd rather use the case to pay down mortgage but not sell appreciated stock.

Now there is an emotional advantage to have a paid of mortgage. I have had and not had mortgage both while working and while retired.

Personally, if I had a wife, and kid, I'd much rather have 160K in liquid assets and mortgage with $800/month payments. If the baby gets really sick and you/and or your wife loss a job have the financial resource to survive a couple of years would give me far greater comfort than have $800 less payments. You can't get 4% mortgages anymore, especially couldn't get them without a job.

 

[samclem]

Personally, if I had a wife, and kid, I'd much rather have 160K in liquid assets and mortgage with $800/month payments.

+1. If you hit a rough patch, you need money. Without a job, it's hard to convert the home equity to cash. It's always easy to go the other way.

 

[ERD50]

...
Personally, if I had a wife, and kid, I'd much rather have 160K in liquid assets and mortgage with $800/month payments. If the baby gets really sick and you/and or your wife loss a job have the financial resource to survive a couple of years would give me far greater government than have $800 less payments. You can't get 4% mortgages anymore, especially couldn't get them without a job.

+ 2 on that!

.... Also saw more than a few people lose their jobs over the past 5 years. Lose their house to the bank in foreclosure and that tipped the scale for me to get house paid off and own something free and clear for the family in case seething happened to me. Again it's just piece of mind ....

That's not really apples-apples, is it?

If those people lost their house when they lost their jobs, they likely were not in a position to be able to pay off the mortgage like the OP, right? Those people were likely living near paycheck-to-paycheck without much/any savings.

Like someone said earlier, $158,000 will make an $800 mortgage payment for lots of months. And the tax payment, and electric bill, and maintenance, and put food on the table, etc, etc. Where does that come from if you lose your job and have little savings?

Pay it off or not, but don't underestimate the value of the liquidity of a portfolio, and don't overestimate the 'freedom' from not having a mortgage, when all those other bills keep coming in.

-ERD50

 

[aja8888]

Why not do something simple and make an additional principal payment each month (and make sure it's applied to the remaining principal). For a few hundred dollars a month additional, you can turn that 30 year mortgage into a near 15 year one and save ton in interest.

 

[panhead]

I have been contemplating the same thing. My mortgage rate is about a point lower than yours, and the payoff amount is about 10% of my total portfolio with plenty of after tax investments still left over, so the math is a bit different. I currently have the payoff $$ in cash as I was re-balancing from stocks to bonds and delayed re-deploying to bonds as I contemplated the payoff question. I've started looking at my home mortgage as a 'negative bond' so the money could either go to bonds (or other FI) or payoff the mortgage, either way my AA stays the same. My current thinking is to see what happens at year end while keeping the $$ in a high yield (yeah, right) savngs account. By keeping the $$ there and not paying off the mortgage, I'm running about a negative 1.5% return. Not great, but might be worth it given the advantages of liquidity. Markety timing? Maybe, but the opportunity to pay off my mortgage doesn't go away until I DO pay it off, if you get my point.
I don't know if any of that thinking helps you, but hopefully it provides some food for though.

 

[Islandtraveler]

I am of the opinion that paying off the house is a good idea. The market has done well and has brought many investors accounts to levels that they were not expecting. Why not trade some of that off for the security of living debt free? The “experts” will tell you that this is a bad idea but can they guarantee that the gains will last?

There is a sense of security one feels when receiving that Mortgage Satisfaction letter from the bank. That is what I did 18 months after purchasing my home after a run of good luck as a gun slinging index futures trader. I realized that my gains could quickly become losses. Fortunately I got out of that out of my system and have not had a mortgage in 17 years. I have absolutely no regrets about it and attribute that decision to the investment discipline that I have since developed.

 

[audreyh1]

Using 10% or less of your investments to pay off a mortgage is one thing. Using 50% of your investments to pay off a house is another thing entirely!

It's all about proportion here.

If someone has the liquid assets to cover several years of house payments and other emergencies if they lose their job, THEY AREN'T GOING TO LOSE THEIR HOUSE. Why pretend that's a risk?

Why go all or nothing? As many folks have pointed out, you can advance a little more money towards the principal each month and accelerate the payoff somewhat without compromising growing your stash of far more liquid assets. In a financial emergency you don't want to be house rich and cash poor.

 

[photoguy]

Taxes are significant factor in figuring out if I should pay off my mortgage. There are many factors involved especially with respect to being able to itemize deductions.
You really need to get your favorite tax program Turbo tax or whatever and figure out how much after tax money the mortgage is costing you.

I agree with Clifp that you should figure out exactly how much it is going to cost you tax wise. Personally, I would be very hesitant to pay off a mortgage if it meant selling stocks and incurring additional taxes (especially while working).

I did not pay off my mortgage early but I did start making additional payments once I felt that my investment portfolio was large enough. Keep in mind that generally housing tracks inflation which is lower than expected returns of the market.

 

[pb4uski]

I would not pay off the house. If you're earning $155k a year, then $800/month is a nit - put it on autopay and forget about it. I think in the long run you will earn more than the 4% mortgage interest that you are paying. You could probably even go out today and buy some muni bonds that pay more than the after-tax cost of mortgage interest (5 and 10 year investment grade munis are paying 3.3% and 4.7%, respectively).

Plus, the capital gains tax you would have to pay on stocks you sell to pay off the house doesn't make it worthwhile IMO.

Unless your job security is poor, you probably have too much cash, but you already know that. Your first step is to decide how much of an emergency fund you want to carry. I would target 12 months of spending.

Another decision is what is your target AA (excluding your emergency fund). When I was 32, it would have been 100% stocks, but you need to decide what is comfortable for you.

If you decide your AA is 100% stocks, then take any excess cash and invest 1/6 of it each month for the next 6 months or 1/12th of it for each of the next 12 months.

Then go play with that 4 month old.

 

[Fermion]

With firm plans on selling our house no matter what in 2 years (or less) and having no children and no real deductions (so using standard deduction) it makes a lot of sense to put money that would normally be allocated to bonds into the house loan instead, even at 3.625%.

To earn 3.625% in a 2 year CD tax free, you would actually need around 5% return. There is zero chance of a 2 year CD with a 5% return coming available in the next 2 years.

 

[Islandtraveler]

Using 10% or less of your investments to pay off a mortgage is one thing. Using 50% of your investments to pay off a house is another thing entirely!

It's all about proportion here.

If someone has the liquid assets to cover several years of house payments and other emergencies if they lose their job, THEY AREN'T GOING TO LOSE THEIR HOUSE. Why pretend that's a risk?

Why go all or nothing? As many folks have pointed out, you can advance a little more money towards the principal each month and accelerate the payoff somewhat without compromising growing your stash of far more liquid assets. In a financial emergency you don't want to be house rich and cash poor.

That is a good point as we all must review our situations. My thought is to protect unexpected gains from evaporating. One could always pre-pay the mortgage and than establish a HELOC for protection.

 

[Closet_Gamer]

i have 4%, 30 year fixed rate. Also, i am not sure what to with the 90 K in cash, if i don't apply it towards the mortgage. i am in 28% tax bracket

Are you still accumulating cash at a reasonably fast pace? Said differently, will your cash war chest refill if you make it illiquid by putting it onto the mortgage?

Facing a similar situation in the past, we went part way. Take $40k of your cash and slam it on the house. You'll knock your lifetime mortgage costs way down and move your payoff date years closer while maintaining a nice cash position to invest on the market and cover emergencies. If you look up in a year and have $90k in cash on hand again, you can repeat the process until the house is paid off.

We did that from about the time I was 37 and finished it when I was about 40. It put a big smile on my face everytime I walked into the bank and wrote them a $25k check. Very liberating when we were done with the mortgage but We never put ourselves into a position where we didn't have a big cash reserve on hand.

Good luck. High class problem!!

 

[haha]

So many things enter into this question that it is very unlikely that anyone here or on any other forum will be able to give you good advice. There are to many considerations that we do not know about.

If you can, analyze it yourself and make your decision. If you do not feel you can do this, pay someone experienced to interview you and help you decide.

I felt that it was likely always a bad idea to pay off a mortgage, but with all the Obamacare goodies, and phase-out's etc. it may be a very tricky question for you.

Ha