Pay down mortgage or add to taxable account?

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Casey Ryback
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Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sat Jan 18, 2020 8:09 am

Hi - I am married (35yo and wife 33yo) with two children. My cash balance is a little higher than it needs to be. My taxable account is probably lower than it should be. I would like to pay down the mortgage but want to be smart about it. We max backdoor Roth and 401ks (we are going to cool down on the 529s). Any thoughts on how to apply cash? I’m inclined to pay down the mortgage, but at the same time, I recognize that my taxable account is low. Thanks for your help.


This is what we have:
Taxable account: 90k
His 401k: $340k
Her 401k: $225k
His Roth IRA: $110k
Her Roth IRA: $90k
Total 529 balances: $170k
High yield savings balance: $200k
Other investment balances (real estate): $100k
House: FMV of $340k. 5 years into 30 year fixed at 3.45%. Principal balance remaining is $230k.
No debt aside from mortgage.

Silk McCue
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Re: Pay down mortgage or add to taxable account?

Post by Silk McCue » Sat Jan 18, 2020 9:21 am

If I were in your shoes I think I would leave enough in the HYS to act as an emergency fund and then split the remainder between the mortgage and Taxable account. I would then take excess funds going forward and apply them 50/50 to the same split. If available I would have the mortgage recast when doing the lump sum payment.

Cheers

stan1
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Re: Pay down mortgage or add to taxable account?

Post by stan1 » Sat Jan 18, 2020 9:29 am

At your ages you probably have not been through an economic downturn. If you have corporate jobs make sure you consider the possibility of losing at least one income. If there's a chance you would have to relocate to seek employment I would not pay off the mortgage.

Over the long term whatever course you take won't matter much. My first thought was to split 50/50 then I saw that you have almost enough cash to pay off the mortgage now. To be honest you are so close to paying off the mortgage I might just go ahead and do it then redirect the entire amount of your mortgage payments into taxable accounts.

Chadnudj
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Re: Pay down mortgage or add to taxable account?

Post by Chadnudj » Sat Jan 18, 2020 9:36 am

I'll echo the poster above -- why not do both? 50% to mortgage principal paydown, 50% to taxable sounds smart and diversifies your risk/reward in terms of return.

If you have to do one, though -- do the taxable. Liquidity (even if the taxable account drops 50% or whatever) is awesome to have in the event of job loss/emergency/opportunity to redeploy, whereas home equity cannot be tapped as easily. And at some point in the future, if you have enough in your taxable account, you can just wake up one morning and pay off your mortgage.

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Iowa David
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Re: Pay down mortgage or add to taxable account?

Post by Iowa David » Sat Jan 18, 2020 9:54 am

I'm a big fan of splitting the difference and Dollar Cost Averaging.

For example - take the $200K in savings and have $16K/month ($8K towards mortgage/$8K towards taxable investments) for 12 months.

This provides a nice psychological factor that you're both paying down debt and investing while hedging against any major market change. You may find after 3-6 months that your situation has changed so you have the flexibility of stopping the payments or changing which bucket you place funds into.

Having recently paid off our mortgage, there's comfort knowing that you have more flexibility to weather a storm.

Let me know your thoughts on this approach.
"Just a 1 percent difference in expenses makes an 18 percent difference in returns when compounded over 20 years." The Boglehead's Guide to Investing

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sat Jan 18, 2020 10:08 am

I like the idea of the 50/50 split. I may go ahead and make larger payment toward the mortgage (e.g., $50k) and dollar cost average into the taxable account. I know history tells us to invest the full amount at once, but I do feel more comfortable with the DCA approach.

With respect to our jobs, my wife works in the medical industry. Very stable, although she wants to go to part-time in three years. I am self-employed. Income is certainly variable, but we won’t be moving very far, if at all.

NJ_Bogler
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Re: Pay down mortgage or add to taxable account?

Post by NJ_Bogler » Sat Jan 18, 2020 11:20 am

At that interest rate I would not pay down the mortgage. There is an argument to be made that once you have the funds to pay off the mortgage in its entirety, then maybe you do so. Until then, put it in taxable. If you ever have a downturn, you will regret having put some of this money into the mortgage while still having the same monthly payment. Getting cash out of the house won’t be easy in a downturn (HELOCs often get closed).

Silk McCue
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Re: Pay down mortgage or add to taxable account?

Post by Silk McCue » Sat Jan 18, 2020 12:52 pm

NJ_Bogler wrote:
Sat Jan 18, 2020 11:20 am
...
If you ever have a downturn, you will regret having put some of this money into the mortgage while still having the same monthly payment.
...
This issue can be addressed by recasting the loan when a large payment is made (if the mortgage company allows this).

Cheers

NJ_Bogler
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Re: Pay down mortgage or add to taxable account?

Post by NJ_Bogler » Sat Jan 18, 2020 2:24 pm

Silk McCue wrote:
Sat Jan 18, 2020 12:52 pm
NJ_Bogler wrote:
Sat Jan 18, 2020 11:20 am
...
If you ever have a downturn, you will regret having put some of this money into the mortgage while still having the same monthly payment.
...
This issue can be addressed by recasting the loan when a large payment is made (if the mortgage company allows this).

Cheers
This is true but also very much a YMMV situation. Some banks don’t allow it as you note. Some do it for free. Mine charges $500(!), money I wouldn’t want to spend if unemployed.

Also, I like my odds over the long term of getting a greater after-tax return in the market than 3.85%. Certainly no guarantee of course (which is why I think you can argue paying off the mortgage in its entirety if you have the $).

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grabiner
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Re: Pay down mortgage or add to taxable account?

Post by grabiner » Sun Jan 19, 2020 12:21 am

Do you itemize deductions? You would need to donate at least $7000 to charity to reach the $24,800 standard deduction.

If you do itemize, say in a 24% bracket, paying down the mortgage is a risk-free return of 2.62% for 25 years, which probably isn't worthwhile. You could earn about the same amount on a bond portfolio of comparable risk, keeping the liquidity. (For example, Admiral shares of Vanguard High-Yield Tax-Exempt yield 2.25%; there is some credit risk here, but a much shorter duration means much less interest-rate risk.)

If you don't itemize, paying it down is a risk-free return of 3.45% for 25 years, which is high enough that I would prefer paying it down if you don't need the liquidity and have maxed out all tax-deferred savings.
Wiki David Grabiner

Unladen_Swallow
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Re: Pay down mortgage or add to taxable account?

Post by Unladen_Swallow » Sun Jan 19, 2020 12:49 am

I would pay down mortgage every time.

I would only save in Taxable once all tax advantages space is filled, and there is absolutely no debt.

Our very first contribution to Taxable account was the amount of monthly mortgage payment we didnt need to pay anymore when we paid off our home.

I don't expect others to share my sentiments, but paying off the house is the single gle best financial decision we have made. Mentally, financially, personally, in every which way. My recommendation is made in this context.
"I think it's much more interesting to live not knowing than to have answers which might be wrong." - Richard Feynman

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Wiggums
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Re: Pay down mortgage or add to taxable account?

Post by Wiggums » Sun Jan 19, 2020 5:52 am

I’m a fan of paying off the mortgage.

Not sure why you are slowing down on the 529’s. You will cash glow the remaining college expense?

peterwantstosave
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Re: Pay down mortgage or add to taxable account?

Post by peterwantstosave » Sun Jan 19, 2020 7:28 am

Looks like you're in a very strong financial situation, congratulations.

I would probably do the following. It's not popular, but I really can't stand risk:

I'd cash out all your taxable investments, sell your real estate investments and take the rest out of high yield savings, to pay off the mortgage on your primary residence. That way, in the event of a financial downturn, you will have a paid for house.

I should have added: This way, you maintain all your tax deferred positions and have no debt and an asset (your home).

I'm 36 and that's what I'd do in your position.

Hope this helps, Peter

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 7:46 am

Wiggums wrote:
Sun Jan 19, 2020 5:52 am
I’m a fan of paying off the mortgage.

Not sure why you are slowing down on the 529’s. You will cash glow the remaining college expense?
I’ve got a 3 year old and a 5 year old, and balances for each account total $85k. I realize that’s not going to be enough, but I’m also somewhat fearful of overfunding in those accounts. I may continue to add more, but it will be much smaller contributions than before.

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 7:47 am

peterwantstosave wrote:
Sun Jan 19, 2020 7:28 am
Looks like you're in a very strong financial situation, congratulations.

I would probably do the following. It's not popular, but I really can't stand risk:

I'd cash out all your taxable investments, sell your real estate investments and take the rest out of high yield savings, to pay off the mortgage on your primary residence. That way, in the event of a financial downturn, you will have a paid for house.

I should have added: This way, you maintain all your tax deferred positions and have no debt and an asset (your home).

I'm 36 and that's what I'd do in your position.

Hope this helps, Peter

I appreciate your feedback. My alternative investments are actually my lowest risk/best return investments (although not that large). I plan on keeping them.

Triple digit golfer
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Re: Pay down mortgage or add to taxable account?

Post by Triple digit golfer » Sun Jan 19, 2020 7:52 am

Casey Ryback wrote:
Sun Jan 19, 2020 7:46 am
Wiggums wrote:
Sun Jan 19, 2020 5:52 am
I’m a fan of paying off the mortgage.

Not sure why you are slowing down on the 529’s. You will cash glow the remaining college expense?
I’ve got a 3 year old and a 5 year old, and balances for each account total $85k. I realize that’s not going to be enough, but I’m also somewhat fearful of overfunding in those accounts. I may continue to add more, but it will be much smaller contributions than before.
How will that not be enough?

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 8:30 am

My parents paid for my schooling - including a professional degree - and I feel that I should be able to offer my children the same (if they are respectful, appreciative, and actually want it).

Triple digit golfer
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Re: Pay down mortgage or add to taxable account?

Post by Triple digit golfer » Sun Jan 19, 2020 8:33 am

Casey Ryback wrote:
Sun Jan 19, 2020 8:30 am
My parents paid for my schooling - including a professional degree - and I feel that I should be able to offer my children the same (if they are respectful, appreciative, and actually want it).
I totally understand that am in the same situation. I'm asking how $85k now, with a decade plus left to grow, won't be enough? Even at 2.5% real and no additional contributions, it's $120k+ in today's dollars each.

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 8:48 am

Triple digit golfer wrote:
Sun Jan 19, 2020 8:33 am
Casey Ryback wrote:
Sun Jan 19, 2020 8:30 am
My parents paid for my schooling - including a professional degree - and I feel that I should be able to offer my children the same (if they are respectful, appreciative, and actually want it).
I totally understand that am in the same situation. I'm asking how $85k now, with a decade plus left to grow, won't be enough? Even at 2.5% real and no additional contributions, it's $120k+ in today's dollars each.

I’m probably being too conservative. You’re right.

Triple digit golfer
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Re: Pay down mortgage or add to taxable account?

Post by Triple digit golfer » Sun Jan 19, 2020 8:56 am

Casey Ryback wrote:
Sun Jan 19, 2020 8:48 am
Triple digit golfer wrote:
Sun Jan 19, 2020 8:33 am
Casey Ryback wrote:
Sun Jan 19, 2020 8:30 am
My parents paid for my schooling - including a professional degree - and I feel that I should be able to offer my children the same (if they are respectful, appreciative, and actually want it).
I totally understand that am in the same situation. I'm asking how $85k now, with a decade plus left to grow, won't be enough? Even at 2.5% real and no additional contributions, it's $120k+ in today's dollars each.

I’m probably being too conservative. You’re right.
I suppose it depends on the college choices, scholarships, rate of college inflation, how it's invested, and market returns. A lot of factors, but generally speaking $85k at ages 3 and 5 seems outstanding.

CppCoder
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Re: Pay down mortgage or add to taxable account?

Post by CppCoder » Sun Jan 19, 2020 9:07 am

I could pay off my mortgage with investments in taxable four times over, but I don't want to pay the capital gains taxes. It would probably negate the benefit of paying off the mortgage (15 yr at slightly under 3.25% - last year claimed standard deduction for first time since being a homeowner). My strategy was to open an intermediate duration muni bond fund. Every month, I put half my taxable savings in that muni fund and half allocated per my asset allocation strategy. I do not factor the muni bond fund into my bond allocation and instead consider it a separate "payoff the mortgage fund." Because the fund continues increasing in value and the mortgage payoff is decreasing in value, I modeled the crossover point as being in approximately three years. At that time, I'll cash out the muni fund and pay off the house. Using the 30-day SEC yield, I modeled the difference in savings versus reducing the mortgage via extra principal payments monthly, and the difference is very minor. I view it as the cost of buying an option to keep my liquidity, potentially even after the crossover point if I change my mind about paying off the house, or paying off the house in one lump sum and not messing with recasts. It's another option that works pretty well for low interest rate mortgages.

chevca
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Re: Pay down mortgage or add to taxable account?

Post by chevca » Sun Jan 19, 2020 9:11 am

Casey Ryback wrote:
Sat Jan 18, 2020 8:09 am
I would like to pay down the mortgage but want to be smart about it......
I’m inclined to pay down the mortgage
I see a theme here. Did you post hoping to be talked out of paying down the mortgage?

I'd say, if paying the mortgage down would make you feel best, more comfortable and help you sleep better, then that would be a smart thing for you guys to do.

I'll even echo the poster above and say, use the cash, some from taxable, pay off the mortgage, and then plow a bunch into taxable going forward. You guys are doing great.

Topic Author
Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 9:30 am

chevca wrote:
Sun Jan 19, 2020 9:11 am
Casey Ryback wrote:
Sat Jan 18, 2020 8:09 am
I would like to pay down the mortgage but want to be smart about it......
I’m inclined to pay down the mortgage
I see a theme here. Did you post hoping to be talked out of paying down the mortgage?

I'd say, if paying the mortgage down would make you feel best, more comfortable and help you sleep better, then that would be a smart thing for you guys to do.

I'll even echo the poster above and say, use the cash, some from taxable, pay off the mortgage, and then plow a bunch into taxable going forward. You guys are doing great.
Yes, I guess I was seeing if someone could talk me out of it. My taxable account is extremely low, as I’ve invested almost everything I could into tax-favored accounts since we started our careers. My focus will be paying down the mortgage. I feel more comfortable having a large emergency fund ($125-150k), so I won’t be attempting to do it all at once.

Thanks for your feedback.

chevca
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Re: Pay down mortgage or add to taxable account?

Post by chevca » Sun Jan 19, 2020 10:00 am

"Extremely low" does not equal $90k in taxable. Many of us can't even max out tax advantaged accounts let alone have almost $100k in taxable and $200k in cash to decide what to do with. Keep perspective on this stuff.

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Casey Ryback
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Re: Pay down mortgage or add to taxable account?

Post by Casey Ryback » Sun Jan 19, 2020 10:10 am

chevca wrote:
Sun Jan 19, 2020 10:00 am
"Extremely low" does not equal $90k in taxable. Many of us can't even max out tax advantaged accounts let alone have almost $100k in taxable and $200k in cash to decide what to do with. Keep perspective on this stuff.
I should have clarified that it is low relative to the size of my overall portfolio. That was poorly worded on my part.

poker27
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Re: Pay down mortgage or add to taxable account?

Post by poker27 » Sun Jan 19, 2020 10:16 am

I’ve been asking myself this same question for a while, and my mortgage rate is nearly 1% lower than yours. As of late, I have mostly been paying down my mortgage, with a goal to have it paid off in the next year or so. I get all of the arguments, but holding cash or bonds that pay less than your mortgage rate doesn’t make sense to me at this point

Royal Blue
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Re: Pay down mortgage or add to taxable account?

Post by Royal Blue » Sun Jan 19, 2020 10:43 am

chevca wrote:
Sun Jan 19, 2020 10:00 am
"Extremely low" does not equal $90k in taxable. Many of us can't even max out tax advantaged accounts let alone have almost $100k in taxable and $200k in cash to decide what to do with. Keep perspective on this stuff.
Wouldn’t be a bad idea to also keep the perspective that not everyone earns a low income. 🤷🏻‍♂️

Royal Blue
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Re: Pay down mortgage or add to taxable account?

Post by Royal Blue » Sun Jan 19, 2020 10:49 am

Casey,

If paying off your mortgage is a priority as well as having a robust cash position, perhaps pay down the principal by 100k, keep 100k in HYS, then pay an additional 3k per month to principal on top of your mortgage payment and be mortgage free in 3 years before your wife goes part-time.

It’s an awesome feeling not having a mortgage!

chevca
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Re: Pay down mortgage or add to taxable account?

Post by chevca » Sun Jan 19, 2020 10:56 am

Royal Blue wrote:
Sun Jan 19, 2020 10:43 am
chevca wrote:
Sun Jan 19, 2020 10:00 am
"Extremely low" does not equal $90k in taxable. Many of us can't even max out tax advantaged accounts let alone have almost $100k in taxable and $200k in cash to decide what to do with. Keep perspective on this stuff.
Wouldn’t be a bad idea to also keep the perspective that not everyone earns a low income. 🤷🏻‍♂️
They aren't usually the one's lacking perspective. :wink:

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