CDs to pay my House Payment Thoughts?

[AlabaMalaysia]

Thinking of building a CD ladder in my brokerage account to pay our mortgage in early retirement. I have never bought CDs before but with recent 5% yields I wanted to see if others thought this is a good idea and lend me any tips or things I need to think about that I may be ignorant of.

Wife and I plan to FI in about 2.5 yrs ages 36/38 currently. Withdraw rate of assets will only need to be 2.5% due to us over saving than the regular 3-4%. We refinanced our home basically at bottom for 2.3% 30 yr on 85k. In the last 3-5 months of work, we originally were planning to save the cash and pay off the home as kinda the last check mark, however wouldn't it be wiser to save up say $110,000 cash and buy a CD ladder and use that cash to pay the monthly mortgage payment to have the added flexibility over time?

I was thinking of buying the CDs at Fidelity in my brokerage account and paying the monthly minimum on the mortgage while that makes sense. If rates ever tanked, we could at anytime pay off the house but while rates are this good vs our financed rate make the spread while still having that cash vs all gone to the loan pay off. Any things I need to know about with CDs for this usage, downsides, lessons learned, tips/tricks, or should I look at other instruments? Thank You for any insights.

 

[COcheesehead]

Exactly what I do only with laddered bonds and not just to pay our mortgage, but to pay everything.
I would keep that mortgage all daylong.

 

[AlabaMalaysia]

Would a laddered bond portfolio be wiser than using CDs? I am not experienced much yet with bonds in practice as accumulation phase has been pretty much all equities 95%. On the tax side both options interest payments will count toward our MAGI the same I assume via a brokerage account?

 

[RetireBy90]

I refinanced couple years ago at 2 3/8 and in the same position, although I retired in 2018. I have always paid off extra principal with any extra $$ but this time I plan to ride this to the end. It is even better if you get a deduction for interest r at her than standard deduction on taxes. I don’t see any downside except what would happen if something happened where you can’t make a payment. Doesn’t sound like your situation but things do change, esp with many years for you to enjoy FI.
Congrats on early FI and snagging that LOW rate.

 

[COcheesehead]

Would a laddered bond portfolio be wiser than using CDs? I am not experienced much yet with bonds in practice as accumulation phase has been pretty much all equities 95%. On the tax side both options interest payments will count toward our MAGI the same I assume via a brokerage account?

The upside of CDs is they are easy, safe and right now pay OK. The downside is you would be limiting yourself to just one type of fixed income asset.

 

[pb4uski]

... We refinanced our home basically at bottom for 2.3% 30 yr on 85k. ...

So is your monthly payment only about $327/month?

Just thinking outloud but I think you have 25 years left on the mortgage that could buy a 25 year payout annuity that would pay you $327/month for about $56,000 that would have an IRR of about 5.04% so the monthly annuity payments could be paid into the same bank account that is used to make your mortgage payments and that would defease the mortgage and earn a decent rate of return and a 2.74% spread.

 

[Montecfo]

CD's are unusually well priced right now. Yes, that might be an alternative to paying it off now. Even if the mortgage brings you no tax benefit, the economics still work.

 

[Dash man]

Would a laddered bond portfolio be wiser than using CDs? I am not experienced much yet with bonds in practice as accumulation phase has been pretty much all equities 95%. On the tax side both options interest payments will count toward our MAGI the same I assume via a brokerage account?

CDs are insured and most bonds are not.

 

[COcheesehead]

CDs MAY be insured within restrictions and limits.

 

[RetireBy90]

One thing just came to mind is while you have many years left on the mortgage, most CDs have term of 10 years or less. (I'm sure someone will say go here to get a longer term CD but this is only what I've seen offered.) So if CD rates go down to less than your 2.3% you would be better off paying mortgage off. Of course then CD rates could go back up and you would be back better off with the money in CDs. This is just the arbitrage on CD rates vs your mortgage.

Either way I would keep that mortgage to the end. I sure plan on keeping mine to the bitter end at 2.375% as mentioned above.

 

[COcheesehead]

One thing just came to mind is while you have many years left on the mortgage, most CDs have term of 10 years or less. (I'm sure someone will say go here to get a longer term CD but this is only what I've seen offered.) So if CD rates go down to less than your 2.3% you would be better off paying mortgage off. Of course then CD rates could go back up and you would be back better off with the money in CDs. This is just the arbitrage on CD rates vs your mortgage.

Either way I would keep that mortgage to the end. I sure plan on keeping mine to the bitter end at 2.375% as mentioned above.

One of the reasons I use bonds and not just CDs. You can get longer terms - not necessarily recommending that, but if you can latch onto a nice non callable bond with the yield that gives you the arbitrage you need, it might be attractive. The bast majority of my taxable ladder is in muni bonds so taxes are virtually zero on the income. The income is counted towards ACA however.

 

[arcyallen]

In the last 3-5 months of work, we originally were planning to save the cash and pay off the home as kinda the last check mark, however wouldn't it be wiser to save up say $110,000 cash and buy a CD ladder and use that cash to pay the monthly mortgage payment to have the added flexibility over time?

Sometimes the best choice for you isn't the mathematically most efficient one. While you would very likely end up with more more money in the end keeping the mortgage and investing that money, you'd also still have debt in your life. We paid off our 3.25% mortgage when we FIREd and I still don't regret it. We owe nothing, zero, zilch. There's value in retiring and knowing you own everything outright. I don't think there's a wrong choice here.

If you do decide to keep the mortgage, I'd recommend investing most of that money for the timeframe. I wouldn't buy CDs to pay a bill due over the next thirty years. Instead I'd have a lot of that in stocks, and bonds, and maybe a tiny bit in CDs. But again, do what you're comfortable with. Think about what it would feel like to wake up with no mortgage. If that sounds great or you wouldn't care, take that into consideration.

 

[COcheesehead]

Debt is a tool. You can manage it with math or emotions.

 

[ivinsfan]

Keep the cash. At your age I don't really agree with your comment that you oversaved

 

[Al18]

I wouldn’t think about retiring without a paid off mortgage. If you’re worried about paying off the mortgage, sounds like you need to work longer. At your proposed retirement age, your SS check will be small.

 

[AlabaMalaysia]

I wouldn’t think about retiring without a paid off mortgage. If you’re worried about paying off the mortgage, sounds like you need to work longer. At your proposed retirement age, your SS check will be small.

O maybe I wasn't clear above. We will have the cash set aside soon = $110k in cash we currently owe around $80k something on the home loan. We can pay off the loan anytime we desire, however since our rate is so low with that $110k that is just for the house would it be better to buy CDs or doing something else with current rates the way they are at least for now vs just paying it all off. If at anytime we want to pay off the loan we can as we have the cash regardless say if rates plunge.

We do not need to work longer as I alluded to we can live above our lifestyle with a 2.5% withdraw rate hence oversaved/earned comment, and that would still be spending quite above what we have lived on for the past 15 years that we have kept track of all spending.

I do not factor in SS to our math for inflation adjusted costs as it would just be a bonus that could be for health costs way down the road if we ever get SS.

 

[AlabaMalaysia]

Keep the cash. At your age I don't really agree with your comment that you oversaved

So you mean to keep the $110K and put into interest bearing safe asset like CDs versus just paying the house off? We have the home payoff cash regardless it is separate than our retirement withdraw money pot.

 

[AlabaMalaysia]

So is your monthly payment only about $327/month?

Just thinking outloud but I think you have 25 years left on the mortgage that could buy a 25 year payout annuity that would pay you $327/month for about $56,000 that would have an IRR of about 5.04% so the monthly annuity payments could be paid into the same bank account that is used to make your mortgage payments and that would defease the mortgage and earn a decent rate of return and a 2.74% spread.

Yes that's the mortgage payment amount basically in total with insurance its around $560/month.

The annuity suggestion is interesting thank you for the reply this is what I was hoping to get some different ideas to ponder. I do not know much about annuities. From my quick reading, it does seem like it ties up the cash though once you buy a plan so it may be sacrificing flexibility some if I understand correctly. But the math is interesting. Thanks will look into more details. Any companies people prefer?

 

[Slater]

work on paying extra every month on that mortgage payment & get rid of it....
At that low amount, should be easy to do....

 

[AlabaMalaysia]

work on paying extra every month on that mortgage payment & get rid of it....
At that low amount, should be easy to do....

Maybe I wasn't clear above. We will have the cash set aside soon = $110k in cash we currently owe around $80k something on the home loan. We can pay off the loan anytime we desire, however since our rate is so low with that $110k that is just for the house would it be better to buy CDs or doing something else with current rates the way they are at least for now vs just paying it all off. If at anytime we want to pay off the loan we can as we have the cash regardless say if rates plunge. Was asking about buying CDs or other instruments vs paying off with my low rate vs current interest rates.

 

[AlabaMalaysia]

One of the reasons I use bonds and not just CDs. You can get longer terms - not necessarily recommending that, but if you can latch onto a nice non callable bond with the yield that gives you the arbitrage you need, it might be attractive. The bast majority of my taxable ladder is in muni bonds so taxes are virtually zero on the income. The income is counted towards ACA however.

So I should look into a muni ladder potentially to see if I can get non-callable bonds at good enough rates is what you suggest I investigate? If I buy those all the principal is returned at cost basis as I understand it while pocketing the interest.

 

[AlabaMalaysia]

Sometimes the best choice for you isn't the mathematically most efficient one. While you would very likely end up with more more money in the end keeping the mortgage and investing that money, you'd also still have debt in your life. We paid off our 3.25% mortgage when we FIREd and I still don't regret it. We owe nothing, zero, zilch. There's value in retiring and knowing you own everything outright. I don't think there's a wrong choice here.

If you do decide to keep the mortgage, I'd recommend investing most of that money for the timeframe. I wouldn't buy CDs to pay a bill due over the next thirty years. Instead I'd have a lot of that in stocks, and bonds, and maybe a tiny bit in CDs. But again, do what you're comfortable with. Think about what it would feel like to wake up with no mortgage. If that sounds great or you wouldn't care, take that into consideration.

Kinda what we are thinking is like the first 5 years buy CDs or some other ladder/instrument and then pocket the rate difference and after 5 years see where rates vs mortgage is to eother just pay off or see what deals are out there since this cash is just for the house nothing to do with FI income.

 

[COcheesehead]

Paying off that mortgage would be a mistake.

 

[Slater]

Maybe I wasn't clear above. We will have the cash set aside soon = $110k in cash we currently owe around $80k something on the home loan. We can pay off the loan anytime we desire, however since our rate is so low with that $110k that is just for the house would it be better to buy CDs or doing something else with current rates the way they are at least for now vs just paying it all off. If at anytime we want to pay off the loan we can as we have the cash regardless say if rates plunge. Was asking about buying CDs or other instruments vs paying off with my low rate vs current interest rates.

yes, invest that $110k in a cd...
But if youre really driven, you guys should be continuing to pay down that mortage, pay extra every month, not the bare minimum. You dont need that $110k to pay-off the house, grow the $110k....
When I refi, I continue to pay what I originally did & more....
$80k mortgage is a cake-walk to pay-off early just by adding more money to the monthly payment....

 

[Out-to-Lunch]

I am in the defeasement camp; that is, because of your low interest rate, I support your idea of setting aside the necessary funds and hanging on to that low mortgage.