Saving to pay off mortgage

[Futureplanner]

First off I know this is controversial, but I have decided I want to pay off my low interest mortgage. My mortgage rate is only 2.5% and it seems easy to get 5% or so by investing. It will take about 3-4 years to pay off I estimate.

I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage.

Pros/cons of taxable account money market type fund vs HYSA? Tax implications? Fund suggestions?

I’m pretty new to taxable accounts and related tax implications so any help is appreciated! Thanks.

[welderwannabe]

The money market acts just like a HYSA, just without the FDIC insurance. Review the type of money market to determine what risk you want to take. Please note that even a 'risky' prime money market is still really safe.

Some money markets, like Vanguard Treasury Money Market (VUSXX), or Fidelity Treasury-Only Money Market (FDLXX) will be mostly free of state taxes, so that is a plus in their column. Plus they invest in Treasurys so their risk is the lowest of any money market.

Nothing wrong with paying off your mortgage early, provided you are taking advantage of any tax advantaged investing you can do (401k IRA etc). Dollars should go there first. Left over dollars can go towards the house.

[mhalley]

The logical. Financially best way to deal with a 2.5% mortgage is to never pay it off. But personal finance is personal, and being debt free is a huge deal to many people. If you wan5 to pay it off in a few years, then either is fine. You just might check to see if you would be better off with a muni fund in your tax bracket.

[Gennaro Dillinger]

First off I know this is controversial, but I have decided I want to pay off my low interest mortgage. My mortgage rate is only 2.5% and it seems easy to get 5% or so by investing. It will take about 3-4 years to pay off I estimate.

I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage.

Pros/cons of taxable account money market type fund vs HYSA? Tax implications? Fund suggestions?

I’m pretty new to taxable accounts and related tax implications so any help is appreciated! Thanks.

What you propose sounds reasonable. If you take the extra savings and pay them against the principal every month you get a guaranteed return. When it's paid off you get the satisfaction of having no mortgage which I really enjoy myself. It is a way to force savings - as long as you make the payment every month with extra principal. There is a mountain of information/opinions in here about this issue.

[Futureplanner]

All tax advantage accounts are being maxed out.

Question about long term capital gains tax…isn’t it a lower tax % for the taxable account money market fund than the tax would be on a HYSA?

So therefore more advantageous to hold money in taxable than in the HYSA assuming both had equal return %?

[Tom_T]

All tax advantage accounts are being maxed out.

Question about long term capital gains tax…isn’t it a lower tax % for the taxable account money market fund than the tax would be on a HYSA?

So therefore more advantageous to hold money in taxable than in the HYSA assuming both had equal return %?

Money market funds don't have capital gains. It's a dollar a share.

Also, all of the HYSA interest is taxable. Some MM funds are free from state tax, either all or in part.

Keep in mind that MM and HYSA rates can change quickly. If the Fed reverses course and starts cutting rates, what is 5% today might be 3% in two years. If you buy a CD, you might not get 5% for five years, but at least the rate won't change. There's always a tradeoff.

[ruralavalon]

First off I know this is controversial, but I have decided I want to pay off my low interest mortgage. My mortgage rate is only 2.5% and it seems easy to get 5% or so by investing. It will take about 3-4 years to pay off I estimate.

I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage.

Pros/cons of taxable account money market type fund vs HYSA? Tax implications? Fund suggestions?

I’m pretty new to taxable accounts and related tax implications so any help is appreciated! Thanks.

All tax advantage accounts are being maxed out.

Question about long term capital gains tax…isn’t it a lower tax % for the taxable account money market fund than the tax would be on a HYSA?

So therefore more advantageous to hold money in taxable than in the HYSA assuming both had equal return %?

Rather than "save up money" to pay to off the mortgage why not just put the extra cash on the mortgage principal as the cash becomes available?

[ruralavalon]

Duplicate post deleted.

[KlangFool]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

[smitcat]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

What happens if the equities go down?

[KlangFool]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

What happens if the equities go down?

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

[smitcat]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

What happens if the equities go down?

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

OP says he wants to pay off his mortgage, thiu is his goal...
"I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage."

[jadedfalcons]

You might consider treasuries too. I'm doing the same thing as you but I'm setting the money aside in rolling 4 week treasuries. That way I'm getting over half a point more yield than SPAXX, but also not having to pay state income tax on what I make (may not be an issue for you)

[KlangFool]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

What happens if the equities go down?

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

OP says he wants to pay off his mortgage, thiu is his goal...
"I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage."

And, why would we assume that the goal will not change if the market crashes?

It is normal for folks to change their mind.

KlangFool

[smitcat]

OP,

Why save up money in a MMF to pay off the mortgage when you could just invest in your portfolio? Then, in 3 years, just sell off a portion of your portfolio to pay off the mortgage. If you invest in your portfolio tax efficiently, it will be 100% stock in your taxable account.

KlangFool

What happens if the equities go down?

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

OP says he wants to pay off his mortgage, thiu is his goal...
"I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage."

And, why would we assume that the goal will not change if the market crashes?

It is normal for folks to change their mind.

KlangFool

I thought she/he asked a very clear question - of course anything can change ....so at that time there would be another clear question.

[smitcat]

You might consider treasuries too. I'm doing the same thing as you but I'm setting the money aside in rolling 4 week treasuries. That way I'm getting over half a point more yield than SPAXX, but also not having to pay state income tax on what I make (may not be an issue for you)

I like this approach myself.

[cbs2002]

VMFXX yields 5.3% today. Will that yield be higher or lower in 6 months? A year? Who knows? Don't make your plan assuming you can get 5% annual in a "safe" account for 3-4 years. Interest rates can fluctuate a lot, and U.S. monetary policy favors lower interest rates long term.

It's fine to save and then spend money the way you are describing. Just don't be sad if you find yourself with a pile of money in a year or two that is earning very little. If I wanted to pay off my mortgage in more than a year but less than five, I'd just put the funds in my investments per my current allocation, then pull the trigger at some point in the future when markets were riding high. Yes this is somewhat market timing, but paying off a mortgage is half emotional half financial anyway, so in this case I'm OK with that.

Also how much are we talking? 5% on 100K annually is "only" 5K. Not chump change but not an amount that is going to make or break you long term.

Distributions from VMFXX are taxed as ordinary income even though the distributions are called "dividends." You would want to include the tax liability in your calculations.

[KlangFool]

What happens if the equities go down?

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

OP says he wants to pay off his mortgage, thiu is his goal...
"I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage."

And, why would we assume that the goal will not change if the market crashes?

It is normal for folks to change their mind.

KlangFool

I thought she/he asked a very clear question - of course anything can change ....so at that time there would be another clear question.

Or, we could make sure OP think of the possibility that he/she could change his/her mind in 3 years if the market crashes.

KlangFool

[hand]

Rather than "save up money" to pay to off the mortgage why not just put the extra cash on the mortgage principal as the cash becomes available?

To me, this is the worst of all worlds - every payment reduces liquidity without reducing future cash flow requirements all while losing out on the spread between low mortgage rate and high risk free interest opportunities.

I would never* pay off a mortgage with an interest rate below the risk free rate, but if I was going to, I would take the approach outlined of funding a "mortgage freedom account" and collecting the interest until I could pay off the mortgage in full and eliminate the monthly payment.

* Never is a strong word - would perhaps consider prepaying to stuff a bunch of money into my homestead if there concern for legal action or some other edge case.

[SmileyFace]

If you must, save it up in a MM or HYSA but just hold it there rather than using it to pay off the mortgage UNLESS/UNTIL the MM/HYSA rates fall below that of your mortgage.
Otherwise you are just throwing away free risk-free money.

[cmr79]

Why would someone pay off the mortgage if the portfolio goes down?

Preserving liquidity should be the highest priority at that time.

KlangFool

OP says he wants to pay off his mortgage, thiu is his goal...
"I would like to save up money in either a low risk fund in a taxable account (SPAXX?) or a HYSA to eventually pay off a low rate mortgage."

And, why would we assume that the goal will not change if the market crashes?

It is normal for folks to change their mind.

KlangFool

I thought she/he asked a very clear question - of course anything can change ....so at that time there would be another clear question.

Or, we could make sure OP think of the possibility that he/she could change his/her mind in 3 years if the market crashes.

KlangFool

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

[KlangFool]

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

cmr79,

You just give another reason to invest in the portfolio as opposed to keep it in cash. Unless OP is 100% stock, it will be a good rebalancing opportunity to buy the stock on sale.

KlangFool

[cmr79]

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

cmr79,

You just give another reason to invest in the portfolio as opposed to keep it in cash. Unless OP is 100% stock, it will be a good rebalancing opportunity to buy the stock on sale.

KlangFool

Well, that is what I would recommend OP do too. I wouldn't pay off a 2.5% mortgage early right now. But if OP isn't running excess liquidity risk by paying the mortgage off, I don't think it is a big deal for them to do so. It isn't financially optimal, sure...but we all do "financially suboptimal" things that improve our quality of life in some way. Paying off a low interest rate mortgage is like any other "Can I afford..." thread asking about cars, watches, etc.; OP has already acknowledged that it isn't about financial optimization.

[KlangFool]

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

cmr79,

You just give another reason to invest in the portfolio as opposed to keep it in cash. Unless OP is 100% stock, it will be a good rebalancing opportunity to buy the stock on sale.

KlangFool

Well, that is what I would recommend OP do too. I wouldn't pay off a 2.5% mortgage early right now. But if OP isn't running excess liquidity risk by paying the mortgage off, I don't think it is a big deal for them to do so. It isn't financially optimal, sure...but we all do "financially suboptimal" things that improve our quality of life in some way. Paying off a low interest rate mortgage is like any other "Can I afford..." thread asking about cars, watches, etc.; OP has already acknowledged that it isn't about financial optimization.

If it is not a big deal, why pay it off?

Normally, only people that think it is a big deal that want to pay it off. The only exception are people that are financially independent.

KlangFool

[cmr79]

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

cmr79,

You just give another reason to invest in the portfolio as opposed to keep it in cash. Unless OP is 100% stock, it will be a good rebalancing opportunity to buy the stock on sale.

KlangFool

Well, that is what I would recommend OP do too. I wouldn't pay off a 2.5% mortgage early right now. But if OP isn't running excess liquidity risk by paying the mortgage off, I don't think it is a big deal for them to do so. It isn't financially optimal, sure...but we all do "financially suboptimal" things that improve our quality of life in some way. Paying off a low interest rate mortgage is like any other "Can I afford..." thread asking about cars, watches, etc.; OP has already acknowledged that it isn't about financial optimization.

If it is not a big deal, why pay it off?

Normally, only people that think it is a big deal that want to pay it off. The only exception are people that are financially independent.

KlangFool

If the only issue is that OP loses the arbitrage on the funds otherwise invested at 3.5-4% post tax that are then used to pay down a 2.5% mortgage, I don't think it is that big of a deal. This might be in the range of $1,000 per year per $100k of mortgage now and decreasing for the balance of the mortgage. It isn't life-changing money, it's credit card hacking money. If OP is maximizing all tax advantages accounts already and feels their income is secure enough that they want to splurge for the emotional satisfaction of having a paid-off home, I think they could do a lot worse.

[shess]

First off I know this is controversial, but I have decided I want to pay off my low interest mortgage. My mortgage rate is only 2.5% and it seems easy to get 5% or so by investing. It will take about 3-4 years to pay off I estimate.

IMHO, the case of aggressively paying down principal is mostly only a problem when it will take a long time to get there. If you think you can manage it in 3-4 years, then I don't think there is a huge advantage to maintaining liquidity. In deciding whether to not take that route, I'd definitely consider how much it would hurt if you have to stop the plan mid-stream, say because you get laid off.

If you save in a money-market fund, or short-term bond fund (like BND or BNDS or SGOV), or HYSA, you'll pay taxes on your earnings, but taxes on your 5% in VUSXX fund will more than compensate you for holding. Even more so if your mortgage interest is still enough to influence tax deductions, though that might be unlikely if you can pay it off that quickly. The nice thing about the money-market fund is that you maintain liquidity while waiting for things to build, so if they situation changes you have more flexibility. I have been willing to pay a bit of yield deficit to maintain that flexibility, so I think you're in a good situation with that.

When you get to your payoff amount, simply removing the mortgage payment de-risks your cashflow, which is why holding in a MMF until payoff is reached makes some sense. Up to that point, it's nice to have the MMF to cover payments if you lose your job or something. After that point, having no payments means you don't need that insurance in pocket.

[KlangFool]

You appear to be assuming that OP needs to draw down from their investments. What if OP is in the accumulation phase and has a very stable job situation in a recession-tolerant sector, like government or healthcare? The "coming recession" is unlikely to affect everyone equally...in a way, I'm looking forward to the next recession as both a good opportunity to buy stocks on sale AND a better opportunity for some home renovations when there is less demand for contractors, etc. In my line of work, barring health issues (for which I am adequately insured), I don't anticipate being out of a job until I decide to be.

cmr79,

You just give another reason to invest in the portfolio as opposed to keep it in cash. Unless OP is 100% stock, it will be a good rebalancing opportunity to buy the stock on sale.

KlangFool

Well, that is what I would recommend OP do too. I wouldn't pay off a 2.5% mortgage early right now. But if OP isn't running excess liquidity risk by paying the mortgage off, I don't think it is a big deal for them to do so. It isn't financially optimal, sure...but we all do "financially suboptimal" things that improve our quality of life in some way. Paying off a low interest rate mortgage is like any other "Can I afford..." thread asking about cars, watches, etc.; OP has already acknowledged that it isn't about financial optimization.

If it is not a big deal, why pay it off?

Normally, only people that think it is a big deal that want to pay it off. The only exception are people that are financially independent.

KlangFool

If the only issue is that OP loses the arbitrage on the funds otherwise invested at 3.5-4% post tax that are then used to pay down a 2.5% mortgage, I don't think it is that big of a deal. This might be in the range of $1,000 per year per $100k of mortgage now and decreasing for the balance of the mortgage. It isn't life-changing money, it's credit card hacking money. If OP is maximizing all tax advantages accounts already and feels their income is secure enough that they want to splurge for the emotional satisfaction of having a paid-off home, I think they could do a lot worse.

1) OP is new to the taxable account investing. That means he/she was limited to only tax advantaged account investing.

"If OP is maximizing all tax advantages accounts already"

2) That means except in an usual circumstances, the portfolio size is not very big.

3) And, we do not know whether OP will pay off this mortgage and then take a student loan
for the kid's college education.

4) Yes, it could be a small number. But, why there is a need to pay it off if it really does not matter?

KlangFool

P.S.: OP is only 35 years old.

From 2018,

viewtopic.php?p=4120440#p4120440
"Ok so young investor 30 years old.

Current mix:
60% total stock market index
40% total international stock market index"

[Wiggums]

I wouldn’t prepay a 2.5% mortgage. If OP must, then just send in extra payments as money becomes available.

The 5% money won’t last forever. Our strategy has been to lock in these higher rates for as long as possible.

[cmr79]

1) OP is new to the taxable account investing. That means he/she was limited to only tax advantaged account investing.

"If OP is maximizing all tax advantages accounts already"

2) That means except in an usual circumstances, the portfolio size is not very big.

3) And, we do not know whether OP will pay off this mortgage and then take a student loan
for the kid's college education.

4) Yes, it could be a small number. But, why there is a need to pay it off if it really does not matter?

KlangFool

P.S.: OP is only 35 years old.

From 2018,

viewtopic.php?p=4120440#p4120440
"Ok so young investor 30 years old.

Current mix:
60% total stock market index
40% total international stock market index"

OP could be married (I haven't cross referenced prior posts to know) with 7-figure assets in tax advantaged accounts. My wife and I could theoretically put $145k/year into tax advantaged accounts if we wanted to do max mega backdoor Roth 403b contributions. Being in a position to pay off their mortgage prior to age 40 while contributing at least $29k to a 401k/IRA suggests that we probably aren't dealing with someone who has a terrible spending to income ratio, but I admit that I don't have enough information to really know that for certain.

Most Americans don't have much saved in retirement accounts, don't have taxable accounts, don't save for kids' college education and don't pay extra on their mortgages. Most Bogleheads are not representative Americans. As much as I don't think OP should pay down their 2.5% mortgage, I also don't think we should be assuming that OP is a typical American with typical American spending/savings habits...OP is talking about paying off debt, NOT talking about taking out a 5 year loan to finance a sports car here!

[KlangFool]

OP could be married (I haven't cross referenced prior posts to know) with 7-figure assets in tax advantaged accounts.

cmr79,

If that is true, why would it bothers you to carry a 2.5% mortgage?

KlangFool

[LittleMaggieMae]

I think the OP should consider what other big expenses are on the horizon - a new vehicle in 3 year? A remodel project for the house in 5 years? a new roof in 10 years? College for the kids? A kid's wedding? a big Anniversary "trip of a lifetime"?

Does it make sense to aggressively pay off/pay down off a 2.5% mortgage only to turn around and have to borrow money at a higher interest rate than the mortgage?

Once you've paid down or paid off your mortgage the ONLY way to use that money is to sell the house or take another loan on the house.

If the OP has line items in their "spending plan" for future Big Expenses that they cannot cash flow from their paycheck so they are "saving" money for those expenses... then sure go ahead and pay off the mortgage with extra money. Because when 30K or 40K is needed for a known big expense - the money will be there and a loan won't be needed.

If the OP isn't adding to "sinking funds" for things they will pay cash for in the future - then it might not make a lot of sense to aggressively pay down/pay off such a low interest mortgage. It would be better to save more money every paycheck/month. So they don't have to borrow money in the future at a rate higher than their mortgage rate.

I think the OP has the right idea - save money and build an "after tax" account (be it a HYSA, CDs, eventually investments...) And then at some point in the future decide if paying off the mortgage is the best use of the "after tax" money.

[cmr79]

OP could be married (I haven't cross referenced prior posts to know) with 7-figure assets in tax advantaged accounts.

cmr79,

If that is true, why would it bothers you to carry a 2.5% mortgage?

KlangFool

It wouldn't bother me, but I am not OP.

[Futureplanner]

I appreciate all the insight! Lots of good information here.

One question that may help me determine the best course of action—I am currently in the 32% tax bracket. What percent on the MMF do I need to get to clear the 2.5% mortgage? I’m not sure how to calculate the return I need to achieve.

[cmr79]

I appreciate all the insight! Lots of good information here.

One question that may help me determine the best course of action—I am currently in the 32% tax bracket. What percent on the MMF do I need to get to clear the 2.5% mortgage? I’m not sure how to calculate the return I need to achieve.

After tax mortgage rate x (1 - marginal tax rate on investment) = break even investment yield rate.

If you don't pay any non-federal tax on the MMF and you don't deduct any mortgage interest via itemizing, you would need to earn 3.68% on your investment to break even with paying down your 2.5% mortgage.

[ruralavalon]

OP could be married (I haven't cross referenced prior posts to know) with 7-figure assets in tax advantaged accounts.

cmr79,

If that is true, why would it bothers you to carry a 2.5% mortgage?

KlangFool

Many people fell a lot of personal satisfaction in being debt free with a paid-off home.

[muffins14]

I appreciate all the insight! Lots of good information here.

One question that may help me determine the best course of action—I am currently in the 32% tax bracket. What percent on the MMF do I need to get to clear the 2.5% mortgage? I’m not sure how to calculate the return I need to achieve.

After tax mortgage rate x (1 - marginal tax rate on investment) = break even investment yield rate.

If you don't pay any non-federal tax on the MMF and you don't deduct any mortgage interest via itemizing, you would need to earn 3.68% on your investment to break even with paying down your 2.5% mortgage.

I think you need:

After tax mortgage rate / (1 - marginal tax rate on investment) = break even investment yield rate.

[lakpr]

I appreciate all the insight! Lots of good information here.

One question that may help me determine the best course of action—I am currently in the 32% tax bracket. What percent on the MMF do I need to get to clear the 2.5% mortgage? I’m not sure how to calculate the return I need to achieve.

*Assuming your filing status is Married Filing Jointly

- If your mortgage principal amount is $17,700 / 2.5% = $708k or less, then you are NOT getting any tax benefit from carrying the mortgage. [ This $17,700 is the difference between standard deduction $27,700 for 2023 and SALT deduction of $10,000; I am certain you will have paid at least $10k in state income taxes or property taxes ]
- If your mortgate principal amount is more than $750k, then also you are NOT getting any tax benefit from carrying the mortgage (TCJA limited the tax benefit to first $750k principal amount on home purchases only).
- If you are in the 32% tax bracket, you are subject to Net Investment Income Tax of 3.8%, so the MMF yield is actually taxed at 35.8% for you
- So you will need to get at least 2.5% / (1 - 35.8%) = 3.89% from the Money Market Fund (I am once again assuming that this is a Treasury Money Market Fund and therefore not subject to state taxes; if it is, you will need to get higher yield).

[tesuzuki2002]

Put it in a guaranteed investment that returns more than the 2.5%.... when you have the money saved.. you can then decide if you want to keep earning more and carry the mortgage.. or just pay it and move on. I carried one for a few years at 3.% while I was earning 4% on cash... After a couple years I just paid it... moved on..

Had I waited I'd be in a better position with a 3% mortgage... earning 5-6% on cash.. A little bit of kicking my self.. BUT come on.. I haven't had a mortgage payment in 4 years.. so.... I'm happy with it.

[cmr79]

I appreciate all the insight! Lots of good information here.

One question that may help me determine the best course of action—I am currently in the 32% tax bracket. What percent on the MMF do I need to get to clear the 2.5% mortgage? I’m not sure how to calculate the return I need to achieve.

After tax mortgage rate x (1 - marginal tax rate on investment) = break even investment yield rate.

If you don't pay any non-federal tax on the MMF and you don't deduct any mortgage interest via itemizing, you would need to earn 3.68% on your investment to break even with paying down your 2.5% mortgage.

I think you need:

After tax mortgage rate / (1 - marginal tax rate on investment) = break even investment yield rate.

Ah, thanks for catching that error!

[random_boglehead]

OP: like you I was a young high income earner and paid off my house, though my rate was much higher at the time. Then I got into a car accident that was my fault (human error, happens all the time, thankfully there were no serious injuries). The other party's ambulance chasing attorney did a public property records search and saw that my house was paid off, and was thus a desirable target with assets to pursue (via lawsuit). Fortunately I had decent auto insurance and was able to settle within the policy limits, though I still sweated at the time. Furthermore, my umbrella carrier dropped me like a hot potato once they got wind of the lawsuit, and I was unable to get another policy for the next 10 years with any carrier.

I learned from that experience the value of stealth wealth, and how looking poor like everyone else makes you less of a target for those who might be after your money in a litigious society. I sleep better at night knowing that (according to public records, now that I carry a mortgage and other low interest rate debt) I appear like the average broke consumer, as opposed to an affluent young homeowner with a paid off house at the minimum. Pay off your low rate mortgage at your own peril. To me, it makes zero sense from a mathematical and asset protection perspective. Make sure that you & your spouse never cause an accident, or have a contractor/guest hurt themselves at your home. Otherwise, be prepared to pay dearly in terms of stress and/or money. Good luck.

[bmcgin]

OP: like you I was a young high income earner and paid off my house, though my rate was much higher at the time. Then I got into a car accident that was my fault (human error, happens all the time, thankfully there were no serious injuries). The other party's ambulance chasing attorney did a public property records search and saw that my house was paid off, and was thus a desirable target with assets to pursue (via lawsuit). Fortunately I had decent auto insurance and was able to settle within the policy limits, though I still sweated at the time. Furthermore, my umbrella carrier dropped me like a hot potato once they got wind of the lawsuit, and I was unable to get another policy for the next 10 years with any carrier.

I learned from that experience the value of stealth wealth, and how looking poor like everyone else makes you less of a target for those who might be after your money in a litigious society. I sleep better at night knowing that (according to public records, now that I carry a mortgage and other low interest rate debt) I appear like the average broke consumer, as opposed to an affluent young homeowner with a paid off house at the minimum. Pay off your low rate mortgage at your own peril. To me, it makes zero sense from a mathematical and asset protection perspective. Make sure that you & your spouse never cause an accident, or have a contractor/guest hurt themselves at your home. Otherwise, be prepared to pay dearly in terms of stress and/or money. Good luck.

Side note: Florida and Texas have great homestead laws that protect homeowners in this exact situation. IRAs and retirement accounts also are protected.

OP: Regarding taxes, interest earned in an HYSA or a Money Market Fund is taxed the same at the federal level which is your tax rate. Some MMFs and all treasuries are exempt from state taxes.

Considering that mortgage interest is exempt from taxes (if itemized), it becomes somewhat of a wash situation. Paying taxes on earned interest while at the same time, deducting mortgage interest. Most likely the amount is inconsequential.

I also share the debt-free ideology and would make the same decision to pay off a 2.5% mortgage in a heartbeat. Just be careful there will be many obstacles to jump, such as deciding if you want to keep working the same job, where and when to go on vacation, how much money to save for kids' college funds, determining your net worth, if you want to retire early and so on...It's really hard!

[Tom_T]

The bottom line is that some people here don't like having debt at all, and others use debt as a financial tool. Therefore, there is no one correct answer, and the OP has to decide for himself. The main factor for the OP is to look at his overall financial picture. Financially, it's not hard to determine whether you come out ahead or not by paying it off early. If the mortgage is low-rate and not a burden, and you're young, you may be better off concentrating on the other parts of your financial house (emergency savings, Roth, 401K, etc.) before you worry about the mortgage. Once you reach a point where it doesn't matter one way or the other, then it's an easier decision.

[random_boglehead]

Side note: Florida and Texas have great homestead laws that protect homeowners in this exact situation. IRAs and retirement accounts also are protected.

That's great, but no one wants to deal with the hassles & expenses of navigating the legal system even if they're protected. And I'm willing to bet that most wealthy people have more assets than what's in their retirement accounts and primary home. Sometimes it's easier just to avoid painting yourself as a target, especially when there's not much opportunity cost for doing so.

[SurferLife]

If we’re not really concerned about interest rates since we’re going to pay the house off early, then why not put the money towards the principal when you get it and avoid all the other money moves?

[Dottie57]

Op I paid off my mortgage early by paying more each month. Easy peasy.

[Dottie57]

Op I paid off my mortgage early by paying more each month. Easy peasy.

[bd7]

If we’re not really concerned about interest rates since we’re going to pay the house off early, then why not put the money towards the principal when you get it and avoid all the other money moves?

First, the OP's plan will actually pay of the mortgage a bit faster. Second, he maintains liquidity up until he pays off the mortgage completely, which is more useful than it seems because once the mortgage is fully paid, there is no more monthly payment and thus less need for EF/buffer/liquidity.