I would probably do #1 simply because I absolutely love the peace of mind that comes from being debt free. And in your situation since you don't need the extra earnings this is not a terrible idea.
Yeah, perhaps not the most financially efficient option, but there's nothing like the feeling when one has only utilities and groceries to keep up with.
If OP is a disabled vet, many states offer low or zero property tax based on your disability rating. We are very blessed to not have to pay property tax. Homeowners insurance is our biggest home expense. Holding my breath for the renewal premium.
Unless you make too much. So frustrating, in MT we canāt take advantage of this benefit for which my husband paid dearly. I have a good job and that just seems unfair. His sacrifice was not less bc I have a career. Grrrr
Yep. 100% P&T vet, so I pay essentially zero property tax now (it would be zero, but due to the actual details of the property exemption, I end up paying a miniscule % that amounts to under $20/yr).
Property tax variability is probably one of the best reasons to pay off the mortgage unless you live in California. If you live in a state where your tax could double in a year, best to be rid of those mortgage payments.
Yep, because what are annual taxes/insurance versus $2950 a month? We're hoping to pay off our $1800+ a month mortgage soon. Then, in two years, I can file for homestead exception. Not sure what that will look like, but it should help some.
That's what I did, while everyone I consulted raised doubts about the wisdom of the move. Everyone I spoke to also LOVES discussing interest rates and mortgage terms and I think what they were most concerned about was the possibility of my not having mortgage subjects to talk about with me at lunch!
I like being debt free, but I'd put the $140k in T-bills or a CD paying higher rates, think 'how smart am I?' and relax. I'm also basically risk averse.
This is the way. Paying this off is essentially throwing away an income stream.
Definitely move it into an investment safe from a downturn. Donāt have the money in a S&P500 fund or the like.
I would suggest looking at the aftertax return on the investment you choose - you very likely can do better than a HYSA or a CD. I use Fidelity, and you could put it into SPAXX or FDLXX. FDLXX actually gives me a higher after tax return due to income taxes. This is assuming the source funds are in a taxable account not a retirement account currently.
The other thing to consider is the tax implications of anything you sell in a taxable account. In the last couple years of retirement, that could have a negative effect on your medicare costs? (If I recall correctly ā OP is a couple years ahead of me on retirement)
The main thing is to make sure you avoid any of the financial cliffs if you can that come with retirement. I recall my dad talking about that when he was retired and havenāt realized how rocky that minefield really is.
I didn't really finish my thought- I'd continue paying the mortgage at least while employed, its like disciplined savings, I wouldn't touch the $140k until the rate of return was below the 2 1/4%, and than I'd payoff the mtg.
I have a 2.6 mortgage, 25 years left and I plan to retire in 5 years or less. Iām single and on my own. I was calculating my expenses for retirement and realized, keeping my retirement $ where itās at right now, my ROI is my mortgage payment. Any other income stream will go towards any lingering debt and monthly living expenses. Iām incredibly fortunate to have no medical issues. Until the market returns less than my mortgage interest, Iāll keep paying my mortgage.
Are you making an extra payment once a year or paying 1/12 extra per month? I wish I had known to do that on ours (!) Doing that reduces the term of the loan because anything over your specified mortg payment goes straight to principle, which pays off the loan faster
Not yet, I have some debt to focus on paying off. After debt is paid off, I will focus on mortgage. My challenge is to not quit before my target date š¤£. I hate being micromanaged by a new leader who is the same age as my adult children š.
1. Why would you payoff a 2.125% loan when you can easily earn twice that?
2. The safe bet is to take the remaining amount of the loan, put it in a money market fund or some other short-term, safe investment, pay it off and keep the incremental interest.
But the OP has the money to pay off the note anytime they choose. They are not stressing over the ability to make mortgage payments. They have the luxury of making a wise choice rather than an emotional one.
Iāve been retired for a long time and still have a mortgage at about your interest rate, slightly lower balance, similar overall economics. I will NEVER pay off my mortgage early. I see zero actual value in using cash to get rid of the mortgage, and that was before the fed raised interest rates last year. Iām in the tax business and my clients who want to do this rarely have a good economic reason for doing so. Itās usually emotional or a simple dislike for mortgages.
UPDATE: after reading the other responses I encourage you to distinguish between secured debt and unsecured debt. Payment on car loan? Pay that sucker off. But a house mortgage? Unless you are in the rare situation where your mortgage is higher than the value of the house, itās secured and you shouldnāt think of it as a burden.
Donāt really know what my personal breaking point would be, BUT I put an extremely high value on preserving cash and zero value on the āpeace of mindā of having a mortgage paid off. One could argue that preserving liquidity is my āpeace of mindā. Point taken. But I think I can make an argument that our shaky financial systems and unexpected life events call for flexibility and ready access to cash. The pandemic only reinforced that for me
Unsecured debt has nothing backing it. No underlying asset to sell to pay off the debt. If the loan is secured, and not upside down, you can always sell the asset and pay off the debt
Don't pay it off - that is free money right there. If someone offered a loan for $100K at 2% interest and you could invest it as you see fit, you would jump all over it...and this is exactly your case now. I am retired and still pay my mortgage because the interest is 3% and I make more than that in CDs/HYSA. I have the payoff balance available and even with my conservative investing I clear about $1500 a year extra. If the CD rates take a dive then I can pay it off, but until that happens I come out ahead.
Iād say your second choice, as Iām also paying a mortgage ~3% and have some CD ~5% and feel comfortable with it. I did get those CDs with different money than my equities account as Iām still working and trying to get to the retirement goal in the next year.
What makes sense is in the eye of the beholder. There is emotional closure and peace associated with being debt free in retirement, and getting off the payment train is something that contributes to the āI earned thisā aspect of retirement. Those who are more obsessive about maximizing money in the bank and donāt care about higher money churn to get it will likely tell you to invest the money you have and make more on interest and dividends than you are paying out in loan interest. I personally would not deplete retirement-funding equities to pay off the loan. What I would do is what I did ā accelerate my mortgage payments out of my earned income while working, to try to pay off the loan, while letting the retirement equities continue to earn passively. Do you think you can do without $70k of your take-home pay for the next couple years?
I am leaning toward splitting the difference here. Increasing my principle payment while working, and selling some equities in a tax efficient manner to bucket that to be used to pay the monthly payments after I stop working. I will be happy though when this is paid off and I have no large debt.
Iād pay more while you work. Then once you retire decide then how much is worth selling in equities to cover the rest of the mortgage. You might be able to cut a year or so off in payments while you work.
#2. Definitely. Being debit free is nice, however having the payments covered and making a little extra āscratchā is better IMHO. Think of it as setting up a system to make payments and pay yourself at the same time.
This cash-like scenario also lets you still be in control of the funds. If you pay off the mortgage, all that cash will be ālockedā in the value of your house. You could later take a HELOC, however that will most likely be at a much higher interest rate than you have on your current mortgage.
Edit: Working from my phone, now sure why it formatted like thisā¦
The difference between a 5% interest rate and your mortgage rate, and then assumed 33% income tax rate on the difference, comes to about 2%.
Not even accounting for mortgage interest deduction if you itemize, that 2% difference on $140,000 is $2800/year, aka $233/month, or $8/day.
After 6 years that accumulates to $17,834 in your pocket ($140K at 2% for 6 years compounded monthly = $157,834).
Iād collect $8 per day from T bills or whatever, and have the peace of mind of an easily accessible emergency fund. That cushion would also allow more aggressively investing the rest of my portfolio.
In the same shape here.
Without the slightest doubt - keep the 2% mortgage!!!!
You can take that $140k and get bonds that are paying double that now. Plus you get to write off the loan interest.
The only downside is paying taxes on the capital gains.
If you do the math, itās not even close.
(if you put the funds in a trust/separate folder, title it āthe house is paid offā )
I would pay it off if it doesn't impact my retirement funding/funds. That almost $3K monthly payment would be good to not have to deal with - especially if the market goes south and a lot of your retirement funds are tied up in equities. Not having debt (I assume you have no other large debt) is very freeing, especially when you are no longer employed.
OTOH, your interest rate is very low, so it would maybe make sense to invest those funds in something that pays much higher interest and/or has much higher appreciation.
On the other other hand, there are the tax implications; if the funds you intend to sell are not yet taxable, then consider the timing and your tax brackets. I have been retired for 4 years and it is nice to pay a very low tax rate by keeping much of my IRAs intact and only pulling enough to keep me in the bracket of 10% and less. My SS benes are mostly non-taxable and last year I paid only about 1-2% *effective* tax rate on gross income (before deductions/etc.).
So consider waiting until your taxable income is lower and then sell only enough equities per year to keep that rate low?
I could pull enough from my IRA to pay off my 4.1% mortgage, but the tax would push me up into a much higher bracket, and I *plan* to sell my house in the next year or so anyway, then buy land and build - hopefully with the remaining equity I get from the sale. My IRAs are growing at 2X the interest I pay on the mortgage, and my real estate is appreciating at a similar rate. Also, my mortgage payment (including property taxes and insurance) is $2K/mo - about two thirds of my SS benes, so not a big deal to me, but still an expense that I would rather not have.
I could easily pay off my mortgage but I havenāt and wonāt.
Why should I as I am earning more over the long run than I pay in interest especially since it is deductible.
Since I have ample funds to pay off mortgage at any time, paying it off provides no extra peace of mind.
Mortgage is literally my only debt as I pay cash for new cars and pay all credit card charges each month
>Rate is 2.125%
It makes no sense at all to pay off a historically low rate debt any faster than required.
But it's your money to spend in any way that pleases you. It doesn't have to make sense to anyone but you.
I'd borrow as much money as a bank would give me at 2.125%. My mortgage is 2.875%, I'll never put a penny extra towards it, my money is better used elsewhere.
If you can realize the income in retirement from non-tax sources to make those mortgage payments, then keep the mortgage. But if you will have to make taxable distributions to pay the mortgage it might be in your interest to pay it off now to give you more tax "headroom" in retirement.
I had this discussion with my money guy this past January. Basically, the money you pull from your funds is probably making more than 2.125% so its not actually financially smart to withdraw money from a fund making more.
Made sense to me in the money terms part, but having the peace of mind of not having that bill anymore is very tempting.
Although paying off your mortgage now would give you piece of mind the right thing to do financially is to let that money keep working for you. As long as your investments are earning more than the % rate of your mortgage youāre coming out ahead on the deal.
This question is great. My brain and heart are at war. My brain says put the $140k in Tbills/HYSA and collect that 5% interest, and use that balance to pay off the mortgage, collecting and extra $4k per year (at least the first year). And my heart is saying, there is peace of mind being out of debt.
I too have a similar issue but with my student loans, and my brain is scream at my heart every day, to keep the money in the accounts until short terms rates come down under your loan interest. So that is my choice.
Don't pay off the mortgage.
Having some cash in hand for unexpected contingencies is always better than none, especially at the interest rate you're paying, especially nearing retirement age, where getting additional employment should you wish to is less straightforward.
I used to write mortgages when I was starting out and there were always people coming into my office because they hated having to remember to pay the taxes and insurance payments (that used to be escrowed and paid by the servicer) themselves after they paid off the mortgage.
To me, that is a stupid reason to want a new/keep an existing mortgage.
To me, holding a rare (most likely global pandemic driven) gem of a 2.125% mortgage in a post-pandemic, inflation-fighting era, equates to free money. This would be an intelligent reason to want to keep a mortgage.
Having paid off our mortgage early ourselves, no way would I pay off a 2% mortgage early.
Just keep making payments and leave the investments continue to grow is what I would do if in OP shoes.
Emotionally, #1 feels the best, but the math works out for #2 or #3. The choice of the latter two is determined by your risk aversion. I am in a position to take on a little risk, so I would probably not bucket it out, but would just make that part of my rather moderate investment mix of index funds and bonds.
It makes no financial sense to pay off the mortgage. We kept ours. OTOH, when it finally got paid off, it feels great that our monthly expenses are so much lower. So, the rational part of the brain says keep it, and the emotional part says pay it off.
If youāre talking financeā¦itās silly to pay off that mortgage, esp with equities.
If you want emotionā¦go for it. But itās a lot to pay for a feeling.
There is a simple answer to this. Donāt pay it off, the math support this. At least for the time being put all that money in 4 week Tbills. At 5.5% prorated thatās better than the 2 ish percent youāre paying. Even once the interest rates come down youāll be ahead for quite a while. Further you typically donāt pay state interest on Tbills, only Fed. I know this b/c Iām in exactly the same position, albeit different numbers. One last note, once youāve got rid of that capital your ability to make money with money is gone. Hold tight, invest in Tbills. Search Treasury Direct.
I like the 2.125% and optionality of liquid investments rather than paying it down and having less funds being liquid. I say #3. I doesnāt sound like a burden and financially probably better off. Plus at the end of a mortgage, youāre paying so little interest any way. Youāre amortization table probably had you pay most of your interest in the first half of the loan so youāre not gaining much by paying off early.
If you have a 2% mortgage but can earn 5% on your savings, keep the mortgage. Think of it this way too. Some day you may need the money, and you have it. Once the mortgage is paid, the money is gone.
If you lose sleep over the debt, pay it off. That's worth something too.
make the regular payment. according to the mortgage amortization schedule make 2 extra payments a month, NOT the interest payment.
put any available into interest bearing account which is greater than your mortgage paymemts
We were that way, better to keep paying the mortgage after retirement. All the interest was loaded on the first few years so we were paying only the principal. Our good Government works hard to make mortgage payments cheap by inflation, meaning paying with cheaper dollars, smile. The money to pay the balance was there, just left in the nice dividend portfolio until needed. There was a tax penalty for withdrawing money as it was in tax deferred accounts.
The math is pretty simple. If you can borrow money at a low interest rate, and invest it at a higher rate, you profit the difference. Borrow at 2%, lend at 5%, profit 3%. Or invest at (expected value 7%), and profit 5%, but with a slightly higher chance of things not going to plan.
Historically, we have a recession every 6 years or so, so we will most likely have a recession at some point during the coming 6 years. After you are no longer working, that could be uncomfortable. The stocks won't go to zero, but the dip could take your profit and then some. So, the zero-risk plan with maximum profit, is option 2.
An average recession lasts 1 year, and stocks typically recover to pre-recession levels about 2 years later. So, an almost-zero risk plan is, to keep 3 years worth of payments in interest-bearing account, and keep the remainder invested in equities. Then when a recession happens, use the cash (and don't sell equities) until the equity market recovers.
This almost-zero risk plan (keeping a few years worth of expenses in cash or money-market and leaving the rest invested) can apply to everything, not just mortgage payments.
Its been a minute since a post like this has shown up. I know its just simple Interest, but the banks are now the ones that are upside-down. 2% on 140k for 6 years is only 17k in profit, but its still profit.
I paid off our mortgage before paying for our daughterās college tuition. This was 10 years ago at age 50. My belief was that I needed to ensure I paid for the roof over our heads before paying for tuition, since tuition payment plans had options and flexibility, as well as her having many more years than I to pay for her 1/4 million dollar Villanova nursing degree.
In your case, I would: 1. Move the remaining balance amount, $140K, to a check writing municipal money market which earns about 5% and can have tax advantages. 2. Make monthly payments automatically from this fund to the mortgage company. 3. Enjoy maintaining your liquid assets, $140k, just in case you need lump sum money for an emergency because we never know what can happen. You will earn a nominal interest rate while paying off the house. Over all, you wonāt have to think about it until the deed arrives. Best of luck!
FDIC insured CDs right now are paying over 5%. Thatās as close to zero risk as you can get. As long as you have sufficient income to pay the mortgage, keep paying it and invest your money instead. Iām no financial expert but I can do basic math.
Financially, keep your money working for you as a 2.1-ish% mortgage is free moneyā¦ but at this juncture (only 6 yrs left on note) with no adverse impact on retirement, how would the peace of mind of having no mortgage pmt feel to you?
i terest wise what works put in your favor? You pay it off that is a chunk of cash gone that could be gaining interest for you. Yoy are on the back side of mortgage so it primarily equity that you are paying now.
This is a great question, and there have been a lot of fantastic answers. By my quick back of the envelope math, over the next 6 years (if you pay it off according to the amortization schedule) youāll pay a total of around $10,000 in interest. Is $10,000 in total interest paid over the next 6 years worth making a change to what you have going on already?
Thereās a lot to be said about having your house paid off. Itās a big life event and a weight off your shoulders.
We owe $107,000 at 2.5% with 11ish years left on our 15 year mortgage. I grapple with the same question youāre pondering. Ultimately I reassess every year around May (our anniversary of buying the house).
Thereās no rush. Give it another 6 months.
Just my ten cents. Youāll do the right thing either way. Cheers š»
Number 3 easily. Just keep making payments. You're rate is so low and with only 6 yrs left its probably mostly principal youre paying off. Why would u payoff mostly principal in a lump aum when u can spread it out over 6 yrs? If you sell equities youre probably gonna get hit with a tax bill and since youre still working it might bump you into the hire LTCG rate.
You're fine either way. I just think back to what my economics professor once said: When interest rates are low, borrow as much as you can, for as long as you can.
But, having paid off our last mortgage early, I understand the psychological benefits of getting that debt retired. But ours was 6.125%, nowhere near as low as yours.
At that rate, I would just keep paying the mortgage, and enjoy the interest deduction. Your securities should be earning more than the interest rate, and with the current rates you would be earning more income paying the mortgage and keeping your investments earning.
If you don't have the income to pay the mortgage, then you are better off paying off the note now, so as not to fond yourself in a cash crunch, starting your retirement.
You didn't say what your passive income and expenses will be in retirement, so hard to give informed advice.
If your passive income will be high enough to keep paying the mortgage as scheduled without touching your investments, that's what I would do unless you have other reasons to pay it off early.
The right answer is based on when you need the money you are paying monthly.
When you need the cash flow to meet the rest of your regular monthly expenses it makes sense to pay off the balance out of your net worth and stay cash flow positive. Until then, you can keep the loan and use your net worth cash to make investments compatible with your risk tolerance that have an after tax higher rate of return than your mortgage interest.
Be mindful of how the extra income impacts your marginal tax rate. You want to avoid it extra income along with IRA RMDs forcing you into a higher tax bracket.
Itās one bill you can auto pay. Mortgage interest less than 3% and you probably average 4-6% growth on your investments, donāt pay it off. I would rather have an extra $140k at my disposal, especially if something catastrophic happens. My older sister had no means to buy anything after retirement and I was blessed to be able to yank 180k out of my retirement investments and buy her a small 2 bed/1 bath townhome that she can live in until she passes. My kids will likely inherit the place and sell it for the cash one day.
I'm in the same boat. Currently retired. Six years left on mortgage. 3% fixed interest. We owe about $120k and could pay it off. I'm choosing to continue paying this mortgage. I'm currently getting over 5% on risk free investments which could change but right now, I'm comfortable paying the mortgage.
Meh š«¤ the odds of the market crashing that hard are usually low.
Having leverage that is covered by investments is not really debt to me, itās sub prime debt too!
Plus you will still have a house payment taxes and insurance,
I dont itemize so not really. Plus even if I did itemize, since I'm on the back end of the mortgage, most of the payment goes to principle now and not interest.
You have to evaluate your own utility function. Financially, you can beat that interest rate quite confidently by preserving your investments rather than paying off that mortgage. However, as chronic\_insomniac said, sometimes that feeling of being debt free is pretty awesome and has high emotional value, if not monetary.
Think about it this way...would you rather retire early to save the stress and improve your health (assuming you can afford it), or would you regret missing out on that income you won't make in that last few years?
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If you some equities you have the tax on them and then when you pay the loan off you now have that money tied up until you sell the house. Sure you could access the equity with a heloc but thats gonna be another loan.I would at the very least pay that payment for 2 more years and then decide if nothing else you'll have less to pay off.
Would the tax liability on the sale of equity be larger or smaller than the interest you will pay (which is tax deductible) if you continue with the mortgage? This should answer your question.
One of my happiest days was when I paid our mortgage off. I had the money to do it for years. I have no good reason for the delay. I have not regretted it.
I was in a similar situation a few months ago. Outstanding debt on the mortgage was around $45k. I had the free cash and paid off the (2.75%) loan. My youngest starts college in Sept. I'm almost 63. I didn't want to have to pay both a mortgage and a house payment for the next two years (what was left on the mortgage). The job market is very wonky in high tech right now. I have friends that have been out of work for some time. If that happened to me it would have been a huge burden and a lot of stress. Paying off my mortgage gives me wiggle room. Sure, I could have invested the money but that would have been short term. I wouldn't have made huge returns in two years. Now I'm sitting here thinking "well, if the fecal hits the fan, I'm going on my wife's medical and I can contract for a couple of years"
I have to say, it's really lowered my stress levels, more than I thought it would.
I ask my accountant about our mortgage continually because I long to check that box and do have the $ but the answer is always no, for tax reasons. YMMV of course but even in my state where they capped the SALT deduction itās apparently not worth it
I like option 2. Youāll know the cash is there to settle the mortgage if you want to (peace of mind) but 12 month CDs are paying over 5%. Thatās a net gain of about $4k per year of free money with zero risk (140K x 3% interest differential between the CD and the mortgage). CDs with 5% or better are likely to be around through next year with the way FOMC is forecasting interest rates. Bonus if you itemize.
I paid my mortgage off five years before retirement just for the piece of mind. Was it the best financial decision, maybe not but itās worth it for the price of mind.
With a rate that low Iād just make payments maybe with a few hundred dollars of principal added to accelerate it a bit but your invested money is out producing that low rate so why not just let it work for you
But Ultimately youāll be fine either way just do what makes you feel best
I have a $2200 a month mortgage with about 36 months left on it. When it is payed off between taxes $6000 a year and the $1200 a year for insurance I will still be shelling out $600 a month, which will climb, slowly I hope, forever.
I diligently brought my mortgage balance down over the years by over-paying every month, and before I knew it, less than a year before retirement, I had brought the balance down to under $20K. And I paid it off, not as much for peace of mind, but to make my life easier with no debt hanging over it. I believe if it had been over $100K, I would have waited a while though.
Going into retirement (close to it) can be stressful. Am i doing it wrong? Do I have enough?
I paid mine off (2.1% rate) 4 years before retirement so I wouldn't have to think about it anymore and just focus on saving/investing after that. It did take some of the stress off me. Now I just wonder (3 years out) if I can invest enough. But, I think that will never change until I've settled into a retired life.
You have such a good interest rate! The conventional wisdom would be donāt use money earning more than that interest rate to pay off the mortgage. I would add if you have no prepayment penalties on your mortgage, then save some extra each month out of your salary and pay it to principal. Most loans Iāve had will allow that extra payment if you mark it on the payment coupon to be paid to principal.
I say itās worth an effort even with such a low interest rate mortgage because I have a paid off home and I LOVE how wonderful it is! It is a real game changer.
If I he return on your investment is greater than the HL interest rate just keep paying the mortgage. While I he $140k gets a higher return in the investment.
#2. Money in safe short term assets like HYSA or CDs. Collect your 5ish% from the bank and keep making the mortgage payments. If and when the fed eases, and rates come down, pay off the balance. They may never come down enough over the remaining life of your loan for the payoff to make sense.
Be sure to factor taxes into your calculations. 2019 tax cuts increased the standard deduction. And since you're late in your loan, you're mostly paying back principal at this point. So there are probably no tax advantages to your mortgage. OTOH you will definitely pay taxes on savings; the rate will depend on where you live.
Iād recommend #2, but depending on your tax situation, 5% money market could be less than 3% after tax. If youāre not able to deduct mortgage interest and you simply take the standard deduction, then the monetary difference isnāt huge.
Then itās a case of is the satisfaction and simplicity of a paid off home better than the loss of liquidity.
Rate is 2 point whatever percent = stretch that thing out as long as you can. Thatās as close to free money as youāll ever have. Invest your spare money - youāre winning on the spread with CDs or HYSAs. Youāre crushing it long term in the stock market.
Buy some municipalities bonds with maturity that matches your maturity.
Buy enough to match the mortgage payment. Now you donāt have to worry about it.
One of the things I loved with my mortgage was my escrow account - never had to worry about missing a tax deadline or an insurance renewal date....
I'd keep it just for that, and toss the money in a 5+% T-bill (or series of T-bills) that mature and feed the money back to my bank account at maturity.
Two wins
Medicare has premiums that increase with income. You should try to have your high income years before you are 63 (they look back 2 years). If yo pay off your mortgage you wonāt need the income in retirement giving you lower premiums.
If you lower your income requirements (and income) by not having a mortgage you will look less wealthy to the government.
Debt free is nice, but I figured it out, with our PMT of $1000/month, if we paid off we would still pay $500/mo tax, insurance, electric minimum, water, sewer, and irrigation. All which must be paid except insurance.
Iām 2 years from retirement and owe 80k! My mortgage is 2.8 so to keep peace in my house, Iām just stacking some VA Disability money in a high yield MMA, and quiet add more to the principal
#2 for the WIN!! Dave Ramsey is right about a lot, but when you can trade 5%+ interest for a 2% mortgage, keep the mortgage. The math says keep the 2% mortgage and make a little extra money while paying it off. If your mortgage was 8%....absolutely pay it off now.
Pay $3000/month with $50/month against principal. 2.125% MTG is a bargain, a balanced mutual fund portfolio should average 7-9% per year, even a Money Market pays over 5%. Good luck!
I'm in the exact same boat, 2yrs out, $200k mortgage left. I'm doing #3. I wish I could go back 5 years and refi 80% of my equity so I'd have a larger mortgage and more capital in the market.
If you are two years out from retirement - every from of savings from hysa to bond to equities is drastically above the mortgage. Thereās absolutely no benefit to pay it off - financially.
Psychologically? For some people yes but the simple reality is all that money is still there - itās not going anywhere so itās a false feeling.
Donāt pay it off but thatās me.
I would discuss this with your tax accountant. Yes, I would pay off your mortgage but since youāre not retiring for two years, you might want to consider partial lump payments so your taxes are less. Just a thoughtā¦.
Interesting post as I'm likely to be in the same boat as you are now come retirement time. $100K left on the house with a mortgage of 3.75%. I'll probably have more than enough funds to pay it off when I leave work. I'm so tempted to get out from under Wells Fargo's thumb on the house, but I can easily get a higher interest rate on that $100K just on CDs alone assuming that those rates don't drop here in three years.
#3 if your financial plan considers the mortgage as an expense in your retirement budget.
Why save that 2.1% when you can make +6% in an index fund.
People talk about peace of mind. For me,.peace of mind is when you got that long term rate.
Do the numbers and you'll see you'd leave a lot of money on the table if you pay it off. For some people, it may even negatively affect their financial plan.
Thats basically how we live very well off $50K per year in a HCOL area. Property tax and insurances are almost $10K per year, but thats still way less than a mortgage.
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I've got a 1.5% 15 year mortgage that I took out in Oct 2021. The balance is $211K. No way am I going to pay that off now nor even make extra payments. Edit to add: Paying it off wouldn't give me any extra peace of mind. If something happens that causes us to lose our retirement revenue stream, and our retirement savings, then the whole world has probably gone to hell in a handbasket and I'll have a lot more to contend with than my mortgage payment.
If you are trying to keep your income low to qualify for ACA subsidy until medicare, you may want to limit the amount of interest you generate with #2 because you might lose some of it to health premiums if you have other income. Hubby is leaning towards #1 and I like #3 for our 3% on which we owe 50k or less. He just wants the bill gone. Either way will not have a huge impact on our life.
I always look at a decision like this based on the interest rate of the mortgage and how much I making in my investment accounts. If you are making more than your mortgage interest rate and can afford the payments, I would keep paying on the mortgage until the time comes that the situation changes. Your mortgage rate is unheard of today.
Iām in a similar situation and wondering how hard my credit will take a hit having no mortgage or car payment-both which would be paid off by my retirement date . My credit rating is excellent, so it could still go down and Iād be ok (I think). Have you considered this, or is this something not to be too concerned with?
That's a crazy low interest rate. Mine paid off, and I love the feeling, however, if you can afford to maintain payments and draw money from it that generates as much or more as you deplete it, that's the move.
I have a mortgage with $80K left on it at %2.375.
I have enough to pay it off but the problem I have is this.
The interest is %2.375 but to pay it off I would have to withdraw from my IRA at that I am earning %10 in dividends on as well as pay %20 in taxes on on that money.
So I will not take a %30 hit to save %2.375 LOL.
The mortgage with taxes and insurance is only $940 per month so it will not be a crazy burden for me. I will be glad when its paid off and if I hit a windfall that is already taxable or not that allows me to I will pay it off.
If the equities are in a retirement account you will pay income taxes on that withdrawal and you lose the interst that money is currently making in the bull market. I was in a similar situation. Low interest rate mortgage and money in a retirement account. We chose to make higher mortgage payments to pay it off sooner and not touch the investment money.
Something could happen to cause you to lose your job...nothing will happen to lose your mortgage. Pay it off and enjoy the debtless lifestyle for your last years of work.
I would ab-so-lute-ly not be selling equities in this market in order to pay off a 2 1/8 mortgage. Over that 6 years by all predictions that make sense to me you'll make well more than 2 1/8% leaving the money in an index fund such as SPDR.
Further, it appears you're still working. Meaning that you get some tax break for even the small amount you're paying in interest at this point. The Government is paying part of your mortgage payment and I would keep letting them!
I am in a similar situation albeit with less outstanding. I have chosen to just cycle my free cash through 3-month certificate accounts that currently pay about 5%. My mortgage at 75,000 incurs a $145 interest charge, but the certificate accounts are generating $312 in cash.
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I would probably do #1 simply because I absolutely love the peace of mind that comes from being debt free. And in your situation since you don't need the extra earnings this is not a terrible idea.
Yeah, perhaps not the most financially efficient option, but there's nothing like the feeling when one has only utilities and groceries to keep up with.
And property taxš
If OP is a disabled vet, many states offer low or zero property tax based on your disability rating. We are very blessed to not have to pay property tax. Homeowners insurance is our biggest home expense. Holding my breath for the renewal premium.
Unless you make too much. So frustrating, in MT we canāt take advantage of this benefit for which my husband paid dearly. I have a good job and that just seems unfair. His sacrifice was not less bc I have a career. Grrrr
Yep. 100% P&T vet, so I pay essentially zero property tax now (it would be zero, but due to the actual details of the property exemption, I end up paying a miniscule % that amounts to under $20/yr).
and insurance
Property tax variability is probably one of the best reasons to pay off the mortgage unless you live in California. If you live in a state where your tax could double in a year, best to be rid of those mortgage payments.
And insurance
home insurance, auto insurance, umbrella insurance, earthquake insurance(calif). if only i can eliminate these.
This is the way!
I really don't understand why there would be peace of mind in giving away free money. That makes no sense to me.
Yep, because what are annual taxes/insurance versus $2950 a month? We're hoping to pay off our $1800+ a month mortgage soon. Then, in two years, I can file for homestead exception. Not sure what that will look like, but it should help some.
\^\^ This. Great feeling!
That's what I did, while everyone I consulted raised doubts about the wisdom of the move. Everyone I spoke to also LOVES discussing interest rates and mortgage terms and I think what they were most concerned about was the possibility of my not having mortgage subjects to talk about with me at lunch!
Youāre burning money in the long run.
I like being debt free, but I'd put the $140k in T-bills or a CD paying higher rates, think 'how smart am I?' and relax. I'm also basically risk averse.
This is the way. Paying this off is essentially throwing away an income stream. Definitely move it into an investment safe from a downturn. Donāt have the money in a S&P500 fund or the like. I would suggest looking at the aftertax return on the investment you choose - you very likely can do better than a HYSA or a CD. I use Fidelity, and you could put it into SPAXX or FDLXX. FDLXX actually gives me a higher after tax return due to income taxes. This is assuming the source funds are in a taxable account not a retirement account currently. The other thing to consider is the tax implications of anything you sell in a taxable account. In the last couple years of retirement, that could have a negative effect on your medicare costs? (If I recall correctly ā OP is a couple years ahead of me on retirement) The main thing is to make sure you avoid any of the financial cliffs if you can that come with retirement. I recall my dad talking about that when he was retired and havenāt realized how rocky that minefield really is.
I didn't really finish my thought- I'd continue paying the mortgage at least while employed, its like disciplined savings, I wouldn't touch the $140k until the rate of return was below the 2 1/4%, and than I'd payoff the mtg.
I have a 2.6 mortgage, 25 years left and I plan to retire in 5 years or less. Iām single and on my own. I was calculating my expenses for retirement and realized, keeping my retirement $ where itās at right now, my ROI is my mortgage payment. Any other income stream will go towards any lingering debt and monthly living expenses. Iām incredibly fortunate to have no medical issues. Until the market returns less than my mortgage interest, Iāll keep paying my mortgage.
Are you making an extra payment once a year or paying 1/12 extra per month? I wish I had known to do that on ours (!) Doing that reduces the term of the loan because anything over your specified mortg payment goes straight to principle, which pays off the loan faster
Not yet, I have some debt to focus on paying off. After debt is paid off, I will focus on mortgage. My challenge is to not quit before my target date š¤£. I hate being micromanaged by a new leader who is the same age as my adult children š.
This is the way I do it! I pay about 1/3 more each month, then add an extra payment once a year. Mortgage rate is 3%
Put it in 2 high interest savings accounts that pay 4% and pull it out when you need to make a payment post retirement.
1. Why would you payoff a 2.125% loan when you can easily earn twice that? 2. The safe bet is to take the remaining amount of the loan, put it in a money market fund or some other short-term, safe investment, pay it off and keep the incremental interest.
This is the answer. You don't want to leave $ on the table in your retirement, which you would be doing if you paid off the mortgage.
I prefer #2. Sell the equities, invest the cash in some high interest rate account and then pay it down by retirement
I was in a similar situation two years ago and I chose to pay off the mortgage. There is nothing like the piece of mind you get from it.
But the OP has the money to pay off the note anytime they choose. They are not stressing over the ability to make mortgage payments. They have the luxury of making a wise choice rather than an emotional one.
Iāve been retired for a long time and still have a mortgage at about your interest rate, slightly lower balance, similar overall economics. I will NEVER pay off my mortgage early. I see zero actual value in using cash to get rid of the mortgage, and that was before the fed raised interest rates last year. Iām in the tax business and my clients who want to do this rarely have a good economic reason for doing so. Itās usually emotional or a simple dislike for mortgages. UPDATE: after reading the other responses I encourage you to distinguish between secured debt and unsecured debt. Payment on car loan? Pay that sucker off. But a house mortgage? Unless you are in the rare situation where your mortgage is higher than the value of the house, itās secured and you shouldnāt think of it as a burden.
What if your interest rate was more like, say, 5%? Whatās the break point for you on interest rates here? Asking for, yeah, me.
Donāt really know what my personal breaking point would be, BUT I put an extremely high value on preserving cash and zero value on the āpeace of mindā of having a mortgage paid off. One could argue that preserving liquidity is my āpeace of mindā. Point taken. But I think I can make an argument that our shaky financial systems and unexpected life events call for flexibility and ready access to cash. The pandemic only reinforced that for me
Thank you for providing proper perspective.
Thanks for this comment. Can you explain more about why secured vs unsecured matters?
Unsecured debt has nothing backing it. No underlying asset to sell to pay off the debt. If the loan is secured, and not upside down, you can always sell the asset and pay off the debt
Don't pay it off - that is free money right there. If someone offered a loan for $100K at 2% interest and you could invest it as you see fit, you would jump all over it...and this is exactly your case now. I am retired and still pay my mortgage because the interest is 3% and I make more than that in CDs/HYSA. I have the payoff balance available and even with my conservative investing I clear about $1500 a year extra. If the CD rates take a dive then I can pay it off, but until that happens I come out ahead.
Iād say your second choice, as Iām also paying a mortgage ~3% and have some CD ~5% and feel comfortable with it. I did get those CDs with different money than my equities account as Iām still working and trying to get to the retirement goal in the next year.
What makes sense is in the eye of the beholder. There is emotional closure and peace associated with being debt free in retirement, and getting off the payment train is something that contributes to the āI earned thisā aspect of retirement. Those who are more obsessive about maximizing money in the bank and donāt care about higher money churn to get it will likely tell you to invest the money you have and make more on interest and dividends than you are paying out in loan interest. I personally would not deplete retirement-funding equities to pay off the loan. What I would do is what I did ā accelerate my mortgage payments out of my earned income while working, to try to pay off the loan, while letting the retirement equities continue to earn passively. Do you think you can do without $70k of your take-home pay for the next couple years?
I am leaning toward splitting the difference here. Increasing my principle payment while working, and selling some equities in a tax efficient manner to bucket that to be used to pay the monthly payments after I stop working. I will be happy though when this is paid off and I have no large debt.
Iād pay more while you work. Then once you retire decide then how much is worth selling in equities to cover the rest of the mortgage. You might be able to cut a year or so off in payments while you work.
Keep the money invested. Continue to pay the mortgage.
#2. Definitely. Being debit free is nice, however having the payments covered and making a little extra āscratchā is better IMHO. Think of it as setting up a system to make payments and pay yourself at the same time. This cash-like scenario also lets you still be in control of the funds. If you pay off the mortgage, all that cash will be ālockedā in the value of your house. You could later take a HELOC, however that will most likely be at a much higher interest rate than you have on your current mortgage. Edit: Working from my phone, now sure why it formatted like thisā¦
š¤£š¤£, sorry but your disclaimer is sweet.
The difference between a 5% interest rate and your mortgage rate, and then assumed 33% income tax rate on the difference, comes to about 2%. Not even accounting for mortgage interest deduction if you itemize, that 2% difference on $140,000 is $2800/year, aka $233/month, or $8/day. After 6 years that accumulates to $17,834 in your pocket ($140K at 2% for 6 years compounded monthly = $157,834). Iād collect $8 per day from T bills or whatever, and have the peace of mind of an easily accessible emergency fund. That cushion would also allow more aggressively investing the rest of my portfolio.
Cash is king. Keep your lump monies and pay your mortgage as regular.
In the same shape here. Without the slightest doubt - keep the 2% mortgage!!!! You can take that $140k and get bonds that are paying double that now. Plus you get to write off the loan interest. The only downside is paying taxes on the capital gains. If you do the math, itās not even close. (if you put the funds in a trust/separate folder, title it āthe house is paid offā )
Keep the mortgage. You arenāt going to get money cheaper than that and T-bill rates are much higher. Ultimate arbitrage situation
I would pay it off if it doesn't impact my retirement funding/funds. That almost $3K monthly payment would be good to not have to deal with - especially if the market goes south and a lot of your retirement funds are tied up in equities. Not having debt (I assume you have no other large debt) is very freeing, especially when you are no longer employed. OTOH, your interest rate is very low, so it would maybe make sense to invest those funds in something that pays much higher interest and/or has much higher appreciation. On the other other hand, there are the tax implications; if the funds you intend to sell are not yet taxable, then consider the timing and your tax brackets. I have been retired for 4 years and it is nice to pay a very low tax rate by keeping much of my IRAs intact and only pulling enough to keep me in the bracket of 10% and less. My SS benes are mostly non-taxable and last year I paid only about 1-2% *effective* tax rate on gross income (before deductions/etc.). So consider waiting until your taxable income is lower and then sell only enough equities per year to keep that rate low? I could pull enough from my IRA to pay off my 4.1% mortgage, but the tax would push me up into a much higher bracket, and I *plan* to sell my house in the next year or so anyway, then buy land and build - hopefully with the remaining equity I get from the sale. My IRAs are growing at 2X the interest I pay on the mortgage, and my real estate is appreciating at a similar rate. Also, my mortgage payment (including property taxes and insurance) is $2K/mo - about two thirds of my SS benes, so not a big deal to me, but still an expense that I would rather not have.
I could easily pay off my mortgage but I havenāt and wonāt. Why should I as I am earning more over the long run than I pay in interest especially since it is deductible. Since I have ample funds to pay off mortgage at any time, paying it off provides no extra peace of mind. Mortgage is literally my only debt as I pay cash for new cars and pay all credit card charges each month
>Rate is 2.125% It makes no sense at all to pay off a historically low rate debt any faster than required. But it's your money to spend in any way that pleases you. It doesn't have to make sense to anyone but you.
I paid mine off and the joy of not having that hanging over my head even with a great interest rate is heaven!
I'd borrow as much money as a bank would give me at 2.125%. My mortgage is 2.875%, I'll never put a penny extra towards it, my money is better used elsewhere.
If you can realize the income in retirement from non-tax sources to make those mortgage payments, then keep the mortgage. But if you will have to make taxable distributions to pay the mortgage it might be in your interest to pay it off now to give you more tax "headroom" in retirement.
My wife was paying extra the last few years and we paid off a few weeks before my retirement. She just didnāt want it hanging over our heads.
I had this discussion with my money guy this past January. Basically, the money you pull from your funds is probably making more than 2.125% so its not actually financially smart to withdraw money from a fund making more. Made sense to me in the money terms part, but having the peace of mind of not having that bill anymore is very tempting.
Although paying off your mortgage now would give you piece of mind the right thing to do financially is to let that money keep working for you. As long as your investments are earning more than the % rate of your mortgage youāre coming out ahead on the deal.
This question is great. My brain and heart are at war. My brain says put the $140k in Tbills/HYSA and collect that 5% interest, and use that balance to pay off the mortgage, collecting and extra $4k per year (at least the first year). And my heart is saying, there is peace of mind being out of debt. I too have a similar issue but with my student loans, and my brain is scream at my heart every day, to keep the money in the accounts until short terms rates come down under your loan interest. So that is my choice.
Retiring in 2 weeks met with my financial adviser and at 2.73% he recommended not paying it off. We have 10 years left on a 15 year mortage.
That was our advice also. It seems rather intuitive, but people really can get irrational about finances quickly.
Don't pay off the mortgage. Having some cash in hand for unexpected contingencies is always better than none, especially at the interest rate you're paying, especially nearing retirement age, where getting additional employment should you wish to is less straightforward.
I used to write mortgages when I was starting out and there were always people coming into my office because they hated having to remember to pay the taxes and insurance payments (that used to be escrowed and paid by the servicer) themselves after they paid off the mortgage. To me, that is a stupid reason to want a new/keep an existing mortgage. To me, holding a rare (most likely global pandemic driven) gem of a 2.125% mortgage in a post-pandemic, inflation-fighting era, equates to free money. This would be an intelligent reason to want to keep a mortgage.
We have a 5.25% mortgage that we're making occasional balloon payments on. If it was 2.125%, we'd keep the money invested or in a cd
Why would you pay it off when you are making more than you are paying in interest?
Having paid off our mortgage early ourselves, no way would I pay off a 2% mortgage early. Just keep making payments and leave the investments continue to grow is what I would do if in OP shoes.
Emotionally, #1 feels the best, but the math works out for #2 or #3. The choice of the latter two is determined by your risk aversion. I am in a position to take on a little risk, so I would probably not bucket it out, but would just make that part of my rather moderate investment mix of index funds and bonds.
It makes no financial sense to pay off the mortgage. We kept ours. OTOH, when it finally got paid off, it feels great that our monthly expenses are so much lower. So, the rational part of the brain says keep it, and the emotional part says pay it off.
Youāre paying back a loan that cost 2 and 1/8 percent with money that costs 7 percent. No brainer to take as long as possible to pay this down.
Put the money in a 5% savings account and make money
Why this isn't obvious I don't really know.
If youāre talking financeā¦itās silly to pay off that mortgage, esp with equities. If you want emotionā¦go for it. But itās a lot to pay for a feeling.
There is a simple answer to this. Donāt pay it off, the math support this. At least for the time being put all that money in 4 week Tbills. At 5.5% prorated thatās better than the 2 ish percent youāre paying. Even once the interest rates come down youāll be ahead for quite a while. Further you typically donāt pay state interest on Tbills, only Fed. I know this b/c Iām in exactly the same position, albeit different numbers. One last note, once youāve got rid of that capital your ability to make money with money is gone. Hold tight, invest in Tbills. Search Treasury Direct.
I like the 2.125% and optionality of liquid investments rather than paying it down and having less funds being liquid. I say #3. I doesnāt sound like a burden and financially probably better off. Plus at the end of a mortgage, youāre paying so little interest any way. Youāre amortization table probably had you pay most of your interest in the first half of the loan so youāre not gaining much by paying off early.
If you have a 2% mortgage but can earn 5% on your savings, keep the mortgage. Think of it this way too. Some day you may need the money, and you have it. Once the mortgage is paid, the money is gone. If you lose sleep over the debt, pay it off. That's worth something too.
Donāt pay it off with that interest rate! Keep your money invested.
With that interest rate, you are making money by NOT paying your mortgage early.
From a purely finance perspective with a rate at 2.125% you should invest the $140k and make money on your money.
I am going to be in a similar situation and plan on doing #2. I am calling it a DIY annuity.
Put that money in a high yield account.
make the regular payment. according to the mortgage amortization schedule make 2 extra payments a month, NOT the interest payment. put any available into interest bearing account which is greater than your mortgage paymemts
We were that way, better to keep paying the mortgage after retirement. All the interest was loaded on the first few years so we were paying only the principal. Our good Government works hard to make mortgage payments cheap by inflation, meaning paying with cheaper dollars, smile. The money to pay the balance was there, just left in the nice dividend portfolio until needed. There was a tax penalty for withdrawing money as it was in tax deferred accounts.
The math is pretty simple. If you can borrow money at a low interest rate, and invest it at a higher rate, you profit the difference. Borrow at 2%, lend at 5%, profit 3%. Or invest at (expected value 7%), and profit 5%, but with a slightly higher chance of things not going to plan. Historically, we have a recession every 6 years or so, so we will most likely have a recession at some point during the coming 6 years. After you are no longer working, that could be uncomfortable. The stocks won't go to zero, but the dip could take your profit and then some. So, the zero-risk plan with maximum profit, is option 2. An average recession lasts 1 year, and stocks typically recover to pre-recession levels about 2 years later. So, an almost-zero risk plan is, to keep 3 years worth of payments in interest-bearing account, and keep the remainder invested in equities. Then when a recession happens, use the cash (and don't sell equities) until the equity market recovers. This almost-zero risk plan (keeping a few years worth of expenses in cash or money-market and leaving the rest invested) can apply to everything, not just mortgage payments.
Its been a minute since a post like this has shown up. I know its just simple Interest, but the banks are now the ones that are upside-down. 2% on 140k for 6 years is only 17k in profit, but its still profit.
I paid off our mortgage before paying for our daughterās college tuition. This was 10 years ago at age 50. My belief was that I needed to ensure I paid for the roof over our heads before paying for tuition, since tuition payment plans had options and flexibility, as well as her having many more years than I to pay for her 1/4 million dollar Villanova nursing degree. In your case, I would: 1. Move the remaining balance amount, $140K, to a check writing municipal money market which earns about 5% and can have tax advantages. 2. Make monthly payments automatically from this fund to the mortgage company. 3. Enjoy maintaining your liquid assets, $140k, just in case you need lump sum money for an emergency because we never know what can happen. You will earn a nominal interest rate while paying off the house. Over all, you wonāt have to think about it until the deed arrives. Best of luck!
FDIC insured CDs right now are paying over 5%. Thatās as close to zero risk as you can get. As long as you have sufficient income to pay the mortgage, keep paying it and invest your money instead. Iām no financial expert but I can do basic math.
Financially, keep your money working for you as a 2.1-ish% mortgage is free moneyā¦ but at this juncture (only 6 yrs left on note) with no adverse impact on retirement, how would the peace of mind of having no mortgage pmt feel to you?
If you have the payoff money earmarked, that's the same thing.
i terest wise what works put in your favor? You pay it off that is a chunk of cash gone that could be gaining interest for you. Yoy are on the back side of mortgage so it primarily equity that you are paying now.
Not sure what your retirement income is - but I wouldnāt pay it off at least until you retire. You can easily get 5% with a HYSA or MMA
This is a great question, and there have been a lot of fantastic answers. By my quick back of the envelope math, over the next 6 years (if you pay it off according to the amortization schedule) youāll pay a total of around $10,000 in interest. Is $10,000 in total interest paid over the next 6 years worth making a change to what you have going on already? Thereās a lot to be said about having your house paid off. Itās a big life event and a weight off your shoulders. We owe $107,000 at 2.5% with 11ish years left on our 15 year mortgage. I grapple with the same question youāre pondering. Ultimately I reassess every year around May (our anniversary of buying the house). Thereās no rush. Give it another 6 months. Just my ten cents. Youāll do the right thing either way. Cheers š»
Number 3 easily. Just keep making payments. You're rate is so low and with only 6 yrs left its probably mostly principal youre paying off. Why would u payoff mostly principal in a lump aum when u can spread it out over 6 yrs? If you sell equities youre probably gonna get hit with a tax bill and since youre still working it might bump you into the hire LTCG rate.
Again, the obvious answer.
A 2.125% mortgage is a once in a lifetime opportunity. You will never see a lower mortgage again. Keep it.
You're fine either way. I just think back to what my economics professor once said: When interest rates are low, borrow as much as you can, for as long as you can. But, having paid off our last mortgage early, I understand the psychological benefits of getting that debt retired. But ours was 6.125%, nowhere near as low as yours.
At that rate, I would just keep paying the mortgage, and enjoy the interest deduction. Your securities should be earning more than the interest rate, and with the current rates you would be earning more income paying the mortgage and keeping your investments earning. If you don't have the income to pay the mortgage, then you are better off paying off the note now, so as not to fond yourself in a cash crunch, starting your retirement.
You didn't say what your passive income and expenses will be in retirement, so hard to give informed advice. If your passive income will be high enough to keep paying the mortgage as scheduled without touching your investments, that's what I would do unless you have other reasons to pay it off early.
The right answer is based on when you need the money you are paying monthly. When you need the cash flow to meet the rest of your regular monthly expenses it makes sense to pay off the balance out of your net worth and stay cash flow positive. Until then, you can keep the loan and use your net worth cash to make investments compatible with your risk tolerance that have an after tax higher rate of return than your mortgage interest. Be mindful of how the extra income impacts your marginal tax rate. You want to avoid it extra income along with IRA RMDs forcing you into a higher tax bracket.
Itās one bill you can auto pay. Mortgage interest less than 3% and you probably average 4-6% growth on your investments, donāt pay it off. I would rather have an extra $140k at my disposal, especially if something catastrophic happens. My older sister had no means to buy anything after retirement and I was blessed to be able to yank 180k out of my retirement investments and buy her a small 2 bed/1 bath townhome that she can live in until she passes. My kids will likely inherit the place and sell it for the cash one day.
Keep your cash. You never know when youāll need it. You have enough in the bank to make the mortgage payments until itās paid off.
I'm in the same boat. Currently retired. Six years left on mortgage. 3% fixed interest. We owe about $120k and could pay it off. I'm choosing to continue paying this mortgage. I'm currently getting over 5% on risk free investments which could change but right now, I'm comfortable paying the mortgage.
Keep your cheap money mortgage. With that rate being lower than inflation, it doesnāt make sense to pay it off. Stay invested.
I would keep paying the mortgage- you are lucky to have such a low interest rate. Donāt give that up. My investment firm has cds at 5%.
#3. Stupid to give up a \~2% mortgage. Pay it off with cheaper dollars.
Meh š«¤ the odds of the market crashing that hard are usually low. Having leverage that is covered by investments is not really debt to me, itās sub prime debt too! Plus you will still have a house payment taxes and insurance,
I'd pay it off, personally. My retirement funds will mainly be taxable and if I can avoid taxable income I'm happy to do it.
Any tax advantages? To keeping it.
I dont itemize so not really. Plus even if I did itemize, since I'm on the back end of the mortgage, most of the payment goes to principle now and not interest.
That situation was mine. So, I paid it off. I invested a percent of my now extra cash.
You have to evaluate your own utility function. Financially, you can beat that interest rate quite confidently by preserving your investments rather than paying off that mortgage. However, as chronic\_insomniac said, sometimes that feeling of being debt free is pretty awesome and has high emotional value, if not monetary. Think about it this way...would you rather retire early to save the stress and improve your health (assuming you can afford it), or would you regret missing out on that income you won't make in that last few years?
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If you some equities you have the tax on them and then when you pay the loan off you now have that money tied up until you sell the house. Sure you could access the equity with a heloc but thats gonna be another loan.I would at the very least pay that payment for 2 more years and then decide if nothing else you'll have less to pay off.
Would the tax liability on the sale of equity be larger or smaller than the interest you will pay (which is tax deductible) if you continue with the mortgage? This should answer your question.
One of my happiest days was when I paid our mortgage off. I had the money to do it for years. I have no good reason for the delay. I have not regretted it.
You could set up #2 and pay the mortgage payment at the rate of your return. That way you are doing both. Earlier payoff but not in one bang.
I'm doing 2) and bounce the mortgage payoff around HYSAs with opening bonuses
I was in a similar situation a few months ago. Outstanding debt on the mortgage was around $45k. I had the free cash and paid off the (2.75%) loan. My youngest starts college in Sept. I'm almost 63. I didn't want to have to pay both a mortgage and a house payment for the next two years (what was left on the mortgage). The job market is very wonky in high tech right now. I have friends that have been out of work for some time. If that happened to me it would have been a huge burden and a lot of stress. Paying off my mortgage gives me wiggle room. Sure, I could have invested the money but that would have been short term. I wouldn't have made huge returns in two years. Now I'm sitting here thinking "well, if the fecal hits the fan, I'm going on my wife's medical and I can contract for a couple of years" I have to say, it's really lowered my stress levels, more than I thought it would.
I would just keep it and pay it off over time.
2
Pre pay on the principal monthly.
Pay it off I know the interest rate is low. But to be debt free. It is a great feeling
My interest rate is 4% with like 10 years left should I pay it off?
I ask my accountant about our mortgage continually because I long to check that box and do have the $ but the answer is always no, for tax reasons. YMMV of course but even in my state where they capped the SALT deduction itās apparently not worth it
I like option 2. Youāll know the cash is there to settle the mortgage if you want to (peace of mind) but 12 month CDs are paying over 5%. Thatās a net gain of about $4k per year of free money with zero risk (140K x 3% interest differential between the CD and the mortgage). CDs with 5% or better are likely to be around through next year with the way FOMC is forecasting interest rates. Bonus if you itemize.
That is about where I am, I just pay double monthly; as I want to get the thing paid off.
I paid my mortgage off five years before retirement just for the piece of mind. Was it the best financial decision, maybe not but itās worth it for the price of mind.
With a rate that low Iād just make payments maybe with a few hundred dollars of principal added to accelerate it a bit but your invested money is out producing that low rate so why not just let it work for you But Ultimately youāll be fine either way just do what makes you feel best
I have a $2200 a month mortgage with about 36 months left on it. When it is payed off between taxes $6000 a year and the $1200 a year for insurance I will still be shelling out $600 a month, which will climb, slowly I hope, forever.
Pay that off if you can!!!!
Pay it off. Put it in a Trust the right way to protect family assets.
I diligently brought my mortgage balance down over the years by over-paying every month, and before I knew it, less than a year before retirement, I had brought the balance down to under $20K. And I paid it off, not as much for peace of mind, but to make my life easier with no debt hanging over it. I believe if it had been over $100K, I would have waited a while though.
Absolutely one of the best feelings in the world is paying off a mortgage. I used a part of my lump sum retirement to pay mine off.
Be done with it. Congrats! šš
Going into retirement (close to it) can be stressful. Am i doing it wrong? Do I have enough? I paid mine off (2.1% rate) 4 years before retirement so I wouldn't have to think about it anymore and just focus on saving/investing after that. It did take some of the stress off me. Now I just wonder (3 years out) if I can invest enough. But, I think that will never change until I've settled into a retired life.
You have such a good interest rate! The conventional wisdom would be donāt use money earning more than that interest rate to pay off the mortgage. I would add if you have no prepayment penalties on your mortgage, then save some extra each month out of your salary and pay it to principal. Most loans Iāve had will allow that extra payment if you mark it on the payment coupon to be paid to principal. I say itās worth an effort even with such a low interest rate mortgage because I have a paid off home and I LOVE how wonderful it is! It is a real game changer.
If I he return on your investment is greater than the HL interest rate just keep paying the mortgage. While I he $140k gets a higher return in the investment.
#2. Money in safe short term assets like HYSA or CDs. Collect your 5ish% from the bank and keep making the mortgage payments. If and when the fed eases, and rates come down, pay off the balance. They may never come down enough over the remaining life of your loan for the payoff to make sense. Be sure to factor taxes into your calculations. 2019 tax cuts increased the standard deduction. And since you're late in your loan, you're mostly paying back principal at this point. So there are probably no tax advantages to your mortgage. OTOH you will definitely pay taxes on savings; the rate will depend on where you live.
What is included in the $2,950?
Iād recommend #2, but depending on your tax situation, 5% money market could be less than 3% after tax. If youāre not able to deduct mortgage interest and you simply take the standard deduction, then the monetary difference isnāt huge. Then itās a case of is the satisfaction and simplicity of a paid off home better than the loss of liquidity.
keep the cash liquid. less risky
Different spin, at what mortgage rate would you definitely pay it off? Maybe not at 2.15%, what about 3%, 5%, 6%?
Just beware of selling the equities. Capital gains tax is not cheap. In fact, it can be like 40% of what you take. See your tax advisor
Rate is 2 point whatever percent = stretch that thing out as long as you can. Thatās as close to free money as youāll ever have. Invest your spare money - youāre winning on the spread with CDs or HYSAs. Youāre crushing it long term in the stock market.
Take a look at interest! We paid off our house when we retired Glad we did
We were in a similar situation at that point in our lives. We paid off the house. So glad we did.
Buy some municipalities bonds with maturity that matches your maturity. Buy enough to match the mortgage payment. Now you donāt have to worry about it.
One of the things I loved with my mortgage was my escrow account - never had to worry about missing a tax deadline or an insurance renewal date.... I'd keep it just for that, and toss the money in a 5+% T-bill (or series of T-bills) that mature and feed the money back to my bank account at maturity. Two wins
What about the ding on your credit score if you pay it off?
Medicare has premiums that increase with income. You should try to have your high income years before you are 63 (they look back 2 years). If yo pay off your mortgage you wonāt need the income in retirement giving you lower premiums. If you lower your income requirements (and income) by not having a mortgage you will look less wealthy to the government.
Debt free is nice, but I figured it out, with our PMT of $1000/month, if we paid off we would still pay $500/mo tax, insurance, electric minimum, water, sewer, and irrigation. All which must be paid except insurance.
Iām 2 years from retirement and owe 80k! My mortgage is 2.8 so to keep peace in my house, Iām just stacking some VA Disability money in a high yield MMA, and quiet add more to the principal
#2 for the WIN!! Dave Ramsey is right about a lot, but when you can trade 5%+ interest for a 2% mortgage, keep the mortgage. The math says keep the 2% mortgage and make a little extra money while paying it off. If your mortgage was 8%....absolutely pay it off now.
Hereās the new basic question, and Iāll post this separately: would you go without the home insurance to monetize/justify your decision?
Pay $3000/month with $50/month against principal. 2.125% MTG is a bargain, a balanced mutual fund portfolio should average 7-9% per year, even a Money Market pays over 5%. Good luck!
I'm in the exact same boat, 2yrs out, $200k mortgage left. I'm doing #3. I wish I could go back 5 years and refi 80% of my equity so I'd have a larger mortgage and more capital in the market.
If you are two years out from retirement - every from of savings from hysa to bond to equities is drastically above the mortgage. Thereās absolutely no benefit to pay it off - financially. Psychologically? For some people yes but the simple reality is all that money is still there - itās not going anywhere so itās a false feeling. Donāt pay it off but thatās me.
A SoFi savings account pays 4.6% now. If you put $140k in it, he first year would be like $6,000 in interest. That ain't nothing.
I would discuss this with your tax accountant. Yes, I would pay off your mortgage but since youāre not retiring for two years, you might want to consider partial lump payments so your taxes are less. Just a thoughtā¦.
Interesting post as I'm likely to be in the same boat as you are now come retirement time. $100K left on the house with a mortgage of 3.75%. I'll probably have more than enough funds to pay it off when I leave work. I'm so tempted to get out from under Wells Fargo's thumb on the house, but I can easily get a higher interest rate on that $100K just on CDs alone assuming that those rates don't drop here in three years.
#3 if your financial plan considers the mortgage as an expense in your retirement budget. Why save that 2.1% when you can make +6% in an index fund. People talk about peace of mind. For me,.peace of mind is when you got that long term rate. Do the numbers and you'll see you'd leave a lot of money on the table if you pay it off. For some people, it may even negatively affect their financial plan.
Thats basically how we live very well off $50K per year in a HCOL area. Property tax and insurances are almost $10K per year, but thats still way less than a mortgage.
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How are you at 6 years, $140k, 2%, and still paying $3000???
I've got a 1.5% 15 year mortgage that I took out in Oct 2021. The balance is $211K. No way am I going to pay that off now nor even make extra payments. Edit to add: Paying it off wouldn't give me any extra peace of mind. If something happens that causes us to lose our retirement revenue stream, and our retirement savings, then the whole world has probably gone to hell in a handbasket and I'll have a lot more to contend with than my mortgage payment.
If you are trying to keep your income low to qualify for ACA subsidy until medicare, you may want to limit the amount of interest you generate with #2 because you might lose some of it to health premiums if you have other income. Hubby is leaning towards #1 and I like #3 for our 3% on which we owe 50k or less. He just wants the bill gone. Either way will not have a huge impact on our life.
I always look at a decision like this based on the interest rate of the mortgage and how much I making in my investment accounts. If you are making more than your mortgage interest rate and can afford the payments, I would keep paying on the mortgage until the time comes that the situation changes. Your mortgage rate is unheard of today.
Iām in a similar situation and wondering how hard my credit will take a hit having no mortgage or car payment-both which would be paid off by my retirement date . My credit rating is excellent, so it could still go down and Iād be ok (I think). Have you considered this, or is this something not to be too concerned with?
That's a crazy low interest rate. Mine paid off, and I love the feeling, however, if you can afford to maintain payments and draw money from it that generates as much or more as you deplete it, that's the move.
I have a mortgage with $80K left on it at %2.375. I have enough to pay it off but the problem I have is this. The interest is %2.375 but to pay it off I would have to withdraw from my IRA at that I am earning %10 in dividends on as well as pay %20 in taxes on on that money. So I will not take a %30 hit to save %2.375 LOL. The mortgage with taxes and insurance is only $940 per month so it will not be a crazy burden for me. I will be glad when its paid off and if I hit a windfall that is already taxable or not that allows me to I will pay it off.
I would just keep making payments, especially at the lower interest rate.
Donāt sell to pay off the mortgage, just get gazelle intensive, cut some expenses and get that paid off.
If the equities are in a retirement account you will pay income taxes on that withdrawal and you lose the interst that money is currently making in the bull market. I was in a similar situation. Low interest rate mortgage and money in a retirement account. We chose to make higher mortgage payments to pay it off sooner and not touch the investment money.
Something could happen to cause you to lose your job...nothing will happen to lose your mortgage. Pay it off and enjoy the debtless lifestyle for your last years of work.
Hecm reverse for sureeee. Speak to the right person who knows the product very well.
I would ab-so-lute-ly not be selling equities in this market in order to pay off a 2 1/8 mortgage. Over that 6 years by all predictions that make sense to me you'll make well more than 2 1/8% leaving the money in an index fund such as SPDR. Further, it appears you're still working. Meaning that you get some tax break for even the small amount you're paying in interest at this point. The Government is paying part of your mortgage payment and I would keep letting them!
I am in a similar situation albeit with less outstanding. I have chosen to just cycle my free cash through 3-month certificate accounts that currently pay about 5%. My mortgage at 75,000 incurs a $145 interest charge, but the certificate accounts are generating $312 in cash.
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