Payoff 2nd mortgage or invest in taxable account?

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Payoff 2nd mortgage or invest in taxable account?

Postby SlightOfHand » Sat Mar 23, 2013 1:57 pm

I've seen many of these posts, but I think my situation is different enough to warrant a new post.

me 43, spouse 41, children 10,8

tax-deferred retirement accts: $430,000
taxable retirement savings: $190,000

emergency fund: $350,000
529 plans: $65,000

mortgage #1: $110,000 3.99% 7 years remaining (originally 10yr HEL)
mortgage #2: $384,000 3.375% 14 years remaining (originally 15yr mortgage)
home value ~$700,000
no other debt

Marginal tax rate 39.6%
state tax - none

As a small business owner, my income is somewhat variable, and I think I'd like to keep my e-fund at about $100,000. We do max out our tax deferred space, and plan on contributing ~$50,000/yr to our taxable accounts. I'm tempted to pay down mortgage #1 and investing $140,000 into my taxable savings vs ploughing $250,000 into my taxable accounts. My current asset allocation is 70/30 stocks/bonds. If I put all the extra cash in my taxable account I will have to purchase some muni-funds to keep that AA.

I'm tempted to pay off mortgage #1 but wanted the opinion of others smarter and more experienced than me before pulling the trigger.

Thanks in advance,

Ben
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby bdpb » Sat Mar 23, 2013 6:36 pm

I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby Toons » Sat Mar 23, 2013 6:42 pm

bdpb wrote:I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.


+1 Without a doubt 8-)
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby Howie » Sat Mar 23, 2013 6:53 pm

I'd suggest paying off that first mortgage as it is at 4%.

I wonder if the community's advice would be the same if you had a lower rate on that mortgage- say, 2.25%?
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby NYBoglehead » Sat Mar 23, 2013 9:01 pm

Toons wrote:
bdpb wrote:I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.


+1 Without a doubt 8-)


+2

Knock out those mortgages. You have a nice amount of savings already and will be able to save even more once the mortgage(s) are gone. I'd look into muni bonds since you are in the highest tax bracket.
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby SlightOfHand » Sun Mar 24, 2013 11:18 am

NYBoglehead wrote:
Toons wrote:
bdpb wrote:I'd pay off the mortgages before taxable investing in a heartbeat.

At your tax rates, you lose some deductibility of mortgage interest and taxable investing has higher QD taxes.


+1 Without a doubt 8-)


+2

Knock out those mortgages. You have a nice amount of savings already and will be able to save even more once the mortgage(s) are gone. I'd look into muni bonds since you are in the highest tax bracket.


Thanks all! That was my thinking as well, but it's nice to hear confirmation when it's that much money in one fell swoop (at least for us).

bdbp - you recommend paying off both mortgages? The larger one is one year into a 15 year at 3.375. At our marginal rate, that is only approx 2%.
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby NYBoglehead » Sun Mar 24, 2013 11:25 am

^I'd try to knock them both out. You really can't get 2% safe anywhere and after you get rid of those monthly payments you will have large monthly surpluses to invest and be completely debt free.
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby Default User BR » Sun Mar 24, 2013 2:42 pm

NYBoglehead wrote:^I'd try to knock them both out. You really can't get 2% safe anywhere

I would disagree with this. You might not be able to get it right this second, but a low-rate like that provides significant hedging against future increases in rates and inflation.


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Re: Payoff 2nd mortgage or invest in taxable account?

Postby SlightOfHand » Wed Mar 27, 2013 10:19 am

As follow up - I did indeed pay off mortgage#1, the $110,000 HEL, but kept mortgage#2, the $384,000 15yr mortgage. This frees up a little over $2,000/mo in cash-flow, which I will add to my monthly taxable retirement savings. Thanks all for your advice.
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Re: Payoff 2nd mortgage or invest in taxable account?

Postby Watty » Wed Mar 27, 2013 1:27 pm

SlightOfHand wrote:As follow up - I did indeed pay off mortgage#1, the $110,000 HEL, but kept mortgage#2, the $384,000 15yr mortgage. This frees up a little over $2,000/mo in cash-flow, which I will add to my monthly taxable retirement savings. Thanks all for your advice.



Congratulations.

I just noticed that PenFed just dropped their no cost 5/5 ARM down to 2.375% If you wanted to get just a bit more aggressive on paying down the remaining mortgage you could refinance with that loan and drop your interest rate by a full point for the next five years. It can go up by at most 2% in five years and it is then locked again in another give years. Since your current loan is at 3.375% that would give you five years at 1% lower when your balance is higher then in the worst case 1% higher then your current rate for the next five years when you balance is lower. As long as you get it paid off in ten years there would be no downside to this and if the rate adjustment in five years is better than the worst case then you could do very well.

https://www.penfed.org/55-Adjustable-Rate-Mortgage/

I was in a different situation but I refinanced with this loan over a year ago with the plan of getting it paid off in about seven years and the only cost was a couple of hundred dollars for some local tax or fee that they did not cover.
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