Thanks for all of the replies, I enjoy seeing the different perspectives, it really helps in making the decision.
I wouldn't be in a hurry to pay off a 3% mortgage, especially in your situation where once you retire you will not have ready access to your TSP without penalty for 20 years. The flexibility of having ready access to $240k rather than $140k would exceed the benefit and peace of mind of a paid off house IMO.
I've had a mortgage and been mortgage-free and to be honest it doesn't make a difference... even if you don't pay off the mortgage the knowledge that you have enough in taxable funds to pay it off with the stroke of a pen or a few taps is satisfying enough. When we had a mortgage it was on autopay so I hardly noticed it.
The answer might be different depending on what you will be redeeming to pay off the mortgage. For example, I recently paid off my 3.375% mortgage that I had for about 8 years with 7 years to go, but the payoff was coupled with a decision to change my AA and eliminate my allocation to cash... so in effect I traded earning 1.7% interest that was taxable to avoiding paying 3.375% that was not deductible (we use the standard deduction). But if I had sold some of our taxable equities to pay it off early, which is more typical, then that would have been a poor decision.
It is irrational to think that if the market tanks that your taxable account will go down to nothing... the recent great recession in 2008/2009 saw a decline of ~50% and that is the worst in recent history and had fully recovered by 2012. If the investments that you would be selling to pay off the $100k mortagage are equities or highly equities, then beating 3% over 10 or 15 years isn't a very high bar. If your investments earn a conservative 6% over the next 12 years and your average mortgage balance would have been $50k during that period of time then you're forgoing $18k ($50K *(6%-3%)*12 years)... not chump change.
P.S. It is principal, not principle.
Noted and edited, thank you. My taxable account and Roth are both in VG TR2040, 83/13 AA. If I understand you correctly, you paid off your mortgage with funds that were in a savings account earning 1.7%? That would make sense to me to pay off the mortgage. I understand the market timing and that it is frowned upon and that's not what I am trying to do but simple thinking in my mind, if the market is up wouldn't that be a better time to sell the taxable shares and pay the mortgage off if I decide to do so?
Financially it looks like it doesn't matter and you can do what you want. If I read it right you are living off rental/side income and will continue to do so - so your military retirement date is kind of irrelevant. Obviously it is a great backup in case you lose a tenant.
What is missing from your description is the Asset Allocation of your investments. If, for example, you are 30% in bonds and/or cash the payoff math may not show that it "makes sense to continue to pay...". Intermediate bonds have an expected return of ~2% over the next 10 years. And if you are 100% equities the the math needs to be risk adjusted. Also, as others have mentioned, this mortgage is partly on a rental property so there are those tax considerations.
In your case, with your income streams and real estate, I could see you paying off the mortgage and keeping your AA at close to 100% equities.
My taxable account is in the VG TR2040 fund. 83/13
Yes that's correct, I am living off my side income now and have been for some years. The rental income is extra and was not originally a planned part of my retirement income.
In reality, after military retirement I could put the rental income toward my house payment and only be coming out of pocket $625 to make the payment with no extra to principal. I'm somewhere in between the math and emotions.
Pay of a 1/3 of it now, another 1/3 in one year and final 3rd when retire from military.
Just an idea.
Appreciate your service
Thank you and I'm glad to be able to serve. This is something I haven't thought of doing but definitely an interesting idea. Forgive my ignorance but haven't pulled out of my taxable account enough to understand the tax implications of doing so. Would doing it this way majorly affect my tax situation or be better than pulling out a lump sump?
The basis may only grow 3% a year, but the housing cost offset, rent, is like a dividend each month. My home would cost me north of $2,500 a month in rent. I'm 'saving' $2,500 every month with zero risk with an investment that is more than just paper but a hard asset. I think it's all part of my wealth portfolio to have a paid off home.
Interesting... I haven't thought of it this way and I haven't seen anyone in all the other threads I read mention it in that aspect. Just my home not counting the rental would cost me $12-1500 a month to rent. Not to mention the "dividend" that I get from the rental house. Would you mind diving a little deeper into your thoughts on this?
OP. You are way "over thinking" this. Just pay mortgage off. Be done. Talking to people who have paid off mortgage, they will all say. Great. The feeling is good. Life is good.
Talking to financial planners, bank lenders, etc.....who have something to gain...will
always recommend NO...
Again, just do it.......stop dwelling, I think you already have made up your mind.
Just want encouragement from us posters.....Good Luck....Thanks for your service!
Thank you and I'm glad to do it. Yes that is both a curse and a blessing for me sometimes I overthink things especially big financial decisions. I'm on the fence but leaning towards paying it off just to have the freedom/flexibility/clean cut slate of no debt/new life path when I retire from the military. I just like hearing different perspectives on the issue.
For 20 years I've been to places that are dangerous and that I don't want to be in (in the middle east as we speak) and some good, some bad with little flexibility on when you live and what you do. I grew up having most everything I needed but definitely not everything I wanted. My parents and most everyone else in my family are still w*orking and paying on their houses into their 60's. The feeling of being mortgage free would definitely be a good feeling of being free and a feeling of accomplishment but I am still looking long term and want to take into account the math. As I mentioned above, with the rental income I could make my mortgage payment with only $625 out of pocket. Does this make more sense, maybe?
Yes, pay it off. No, keep it. I have not got a clue. IMO, it is less about the simple math. It is more about your personal financial strategy. So, my real answer is "it depends". Maximize long term growth? = keep it (assuming that money is invested in equities). Minimize outstanding debt? = pay it off. Reduce monthly expenses = pay it off. Tax deduction? = Keep it (if you can itemize).
There can be so many "right" answers. Only you can determine what fits your style/plan.
Yes I understand. I do itemize on my taxes so the rental would be a plus, with this being my first year to have it and not being done with my taxes yet, I'm not sure how much it will help me. Won't I still be able to use the rental home as a significant tax deduction after it's paid off though?
The reason this is discussed endlessly on ALL financial fora is that there is no way to know the right answer ahead of time. And there really is no wrong answer. We paid off our current house last Sep. We did it because we could and to be honest, we were always so broke we never thought in a million years we could own our home. So we did it. It felt good. Now we are moving and building a house and I am looking at whether to take out a mortgage or not. I told my broker that if 30 year rates hit 3% with no points, to lock in a conforming loan and I will probably keep it. Subtract 2% inflation and the tax deduction and the real rate is closer to 0%. That's almost free money. And if inflation goes up, I am making money with a mortgage. Or I may just pay it off on a whim. Neither course of action is wrong.
These are exactly my thoughts when thinking about the math portion of it. I'll never borrow money that cheap again. I've also tossed around the idea of paying it off and then sending the amount I would normally be paying for the mortgage back to my taxable account for XX number of years.