Pay off 3.125% 152k mortgage early?

[TarHeel2002]

I'm contemplating adding more to my mortgage payment beginning 2019. I know it's a low interest rate mortgage but it's still debt. Here is some background info.

38 yo married with 3 kids (7,5, and zero)
Income = 250-275k
Annual retirement contributions (401(k), Roth, HSA,) = 50k
Annual 529 contributions = 16.5k
Emergency fund = 30k (4-5 months)
Retirement assets = 567k
529 funds = 67k

Mortgage debt = 152k fixed 3.125% ($750/month payment)

I plan on working at least until mid 50s and then hopefully will have the option to sell off my small business for 500-600k if it all works out.

I receive some of my income at the end of the year so I could lump sum 8-10k on the mortgage at that time. Then I was thinking I could add another 1k every month to the mortgage payment. If I loosely follow this path, I could have my mortgage paid off in 5ish years. I know it's a low interest rate and I might be able to get better returns via compound interest long term in a taxable account. I have a small taxable account with Vanguard. I could also do a mix 50/50 pay off mortgage payment and add to taxable. I am maxing out all tax deferred investment options available to me at this time so any additional funds would go into the taxable account (VTSAX). My concern building up a sizable taxable account is that it's fungible. Maybe I'd get the inclination to buy a new car with cash, maybe a home improvement, maybe a fancy trip. I know I should be able to control myself better than that but there is some satisfaction to paying down the mortgage and watching it slowly shrink (and thinking of the 3.125% I'm saving on every thousand bucks at a time). This is how I motivated/visualized my student loan payoff a few years ago. The difference with that was that I halted all investments to knock it out fast. I don't plan on taking that approach with the mortgage debt. I'll pay it off as extra funds allow within the constraint that I max all tax deferred investing options. I try to have a Vulcan approach to investing but I must admit I am a little bit more like Spock (emotional component to paying off debt). Thanks!

[Toons]

Pay it off as fast as you can,
Laser like focus.

[JoeRetire]

Mortgage debt = 152k fixed 3.125% ($750/month payment)

So it appears that you can easily afford the monthly mortgage payment.
And I'm guessing your investments currently return more than 3.125% right?

I know it's a low interest rate and I might be able to get better returns via compound interest long term in a taxable account.

Yup.

My concern building up a sizable taxable account is that it's fungible. Maybe I'd get the inclination to buy a new car with cash, maybe a home improvement, maybe a fancy trip.

You aren't able to control your spending? Does this happen now in other cases? That might be something you want to work on.

I try to have a Vulcan approach to investing but I must admit I am a little bit more like Spock (emotional component to paying off debt).

I'm not a Trek enthusiast, but wasn't Spock a Vulcan, and non-emotional?

I wouldn't rush to pay off such an inexpensive loan. I'd be investing more.

If you own a small business, you might want to have your CPA find a way for you to put more than just $50k/year into your retirement funds and/or set up an effective deferred compensation plan.

[knowledge]

My concern building up a sizable taxable account is that it's fungible. Maybe I'd get the inclination to buy a new car with cash, maybe a home improvement, maybe a fancy trip.

It's funny. Once you start having some meaningful gains in your account, you start to have an aversion to actually realizing any of the gains. There's materially more friction in dealing with the potential tax consequences than a typical savings account. And you get to enjoy TLH.

I say start building up your taxable.

[Valuethinker]

Paying off the debt is a reasonable alternative to fixed income investing.

The fact that you have your own business should make you more risk averse in your personal financial affairs - which leans towards repaying the debt early. (counterpoint: no "steady job" is safe, today, so in fact being self employed is potentially safer).

I am a fan of retaining liquidity (ie keep the mortgage). However if your alternative is taxable investing, then paying off the mortgage makes financial sense.

[midareff]

Paying off the debt is a reasonable alternative to fixed income investing.

OTOH, I personally don't have an issue with a reasonable amount of low interest rate tax deductible debt. You could put the extra income into something like Vanguard's Intermediate Term Tax-Ex Bond Fund and generate some tax free income with it ... current distribution yield is near 3%. Between the tax consequences and the advantage of building additional liquidity I find that an very attractive option to paying off a mortgage that may never be available again in our lifetimes.

[92irish]

With the new tax change to the standard deduction ($24,000 for married couples), you may actually not be getting much if any value out of the tax deduction for mortgage interest. It depends on your other deductions (property taxes, state income taxes, etc.). We recently paid off our mortgage and I'm glad we did. Under the new tax regime in our circumstance, we'd be getting no mortgage interest tax deduction benefit if we still had our mortgage.

[UncleBogle]

Mortgage debt = 152k fixed 3.125% ($750/month payment)

I try to have a Vulcan approach to investing but I must admit I am a little bit more like Spock (emotional component to paying off debt).

I'm not a Trek enthusiast, but wasn't Spock a Vulcan, and non-emotional?

Well, if no one else will comment on this, as a Trekkie, I'll field that question.

Spock was both Vulcan(Father) and Terran (Earthling Mother).

Though he would do his best to outwardly show the logical, unemotional Vulcan side, every so often, the emotional human side would peek through. Kind of like a frosted mini-wheat....

Live long and Prosper, my son.

[mortfree]

What will you do with the $750 mortgage payment after you pay it off? Also is that just the P&I?

Do you anticipate taking out student loans to cover college? Will those rates be less than your mortgage?

How much is your house worth? trying to determine if you will be house poor.

[Watty]

38 yo married with 3 kids (7,5, and zero)
Income = 250-275k
Annual retirement contributions (401(k), Roth, HSA,) = 50k
Annual 529 contributions = 16.5k
Emergency fund = 30k (4-5 months)
Retirement assets = 567k
529 funds = 67k

Mortgage debt = 152k fixed 3.125% ($750/month payment)

I plan on working at least until mid 50s and then hopefully will have the option to sell off my small business for 500-600k if it all works out.

I am usually very pro "pay it off" but you don't have a lot in taxable accounts and your own a small business. If there is a glitch with your business or you get disabled then you could be in a bind.

I would add invest that money in a taxable account and then pay off all at once.

[Thegame14]

At your age, 38, you have a great income, you have 3 kids, god bless you, and more than half a million in retirement assets. You are absolutely killing it!!!! So if it makes you happy or happier to pay off the mortgage, then do it. Could you maybe get better returns in the market maybe, but either way you are killing it and you have to do what you feel best doing.

[Vulcan]

Mortgage debt = 152k fixed 3.125% ($750/month payment)

I try to have a Vulcan approach to investing but I must admit I am a little bit more like Spock (emotional component to paying off debt).

I'm not a Trek enthusiast, but wasn't Spock a Vulcan, and non-emotional?

Well, if no one else will comment on this, as a Trekkie, I'll field that question.

Spock was both Vulcan(Father) and Terran (Earthling Mother).

Though he would do his best to outwardly show the logical, unemotional Vulcan side, every so often, the emotional human side would peek through. Kind of like a frosted mini-wheat....

Live long and Prosper, my son.

If there are self-made purgatories, then we all have to live in them.

[smitcat]

Spock would not pay the loan off early unless he was having one of his emotional episodes.
Neither would we pay it off with those numbers. Prosper whatever you do.

[fishandgolf]

Pay it off as fast as you can,
Laser like focus.

+1000......

You 're asking this question because you hate debt.....me too. We paid ours off early also......there is no better feeling than having zero debt....

Pay it off.......at WARP SPEED!!!

[JBTX]

I would not pay off a 3.125% mortgage. We have a 3.25% mortgage and prefer to have the additional liquidity and invest part of it. Keep the rest in ibonds, cds, money markets etc.

If you really have the urge to pay it off perhaps pay off so thing like $250 additional per month.

[aristotelian]

Very close premium to paying off the mortgage vs 10 year treasury yield (3%). If you would buy bonds, there is no reason not to pay down the mortgage.

[JoeRetire]

The fact that you have your own business should make you more risk averse in your personal financial affairs

Why?

[selters]

If keeping the mortgage for as long as possible and investing in the stock market instead is a good idea, why not refinance the mortgage up to 80% loan to value ratio every five years or so? That must be an even better idea? The more leverage you use, the higher the returns, right?

[janezoey]

With three kids, you'll be paying for college for about 10 years, with two years where two are in college at the same time. I would not pay off a mortgage with a rate of 3.125% because it's barely above inflation and the payment is small compared to the rest of your annual income. I don't think we'll see a rate that low again in our lifetimes. Federal student loans right now are around 5% and Graduate/Parent Plus loans are around 7.5%. Your $16,500 annual contribution to the 529 indicates to me you are very serious about paying for most of college. So perhaps consider frontloading more into the 529s now, especially for your youngest one who has an 18-year time horizon. If you put more money in the early years, your money will have more time to compound tax-free. Unless you have some amazing 529 state deduction or credit, by the time your younger kids are entering high school, you might want to greatly reduce the $16,500 that you are annually contributing. Your money will only have a few years to grow or recover from an economic crisis, so why lock it up then if the main purpose of a 529 is to avoid capital gains taxes?

Given your income and tax bracket, your family is unlikely to get need-based aid. This article explains why the 529 is a big tax boon for upper-middle-class families who can fund large amounts early:
https://www.brookings.edu/research/a-ta ... ngs-plans/

You have a lot more possible chess moves than most other American families. So at the end of the day, you should do what is most comfortable for your family. But if I were in your shoes I would keep that enviable mortgage rate.

[car733]

3.125% sounds amazing. I would keep it!

[Toons]

Pay it off as fast as you can,
Laser like focus.

+1000......

You 're asking this question because you hate debt.....me too. We paid ours off early also......there is no better feeling than having zero debt....

Pay it off.......at WARP SPEED!!!

[UncleBogle]

Mortgage debt = 152k fixed 3.125% ($750/month payment)

I try to have a Vulcan approach to investing but I must admit I am a little bit more like Spock (emotional component to paying off debt).

I'm not a Trek enthusiast, but wasn't Spock a Vulcan, and non-emotional?

Well, if no one else will comment on this, as a Trekkie, I'll field that question.

Spock was both Vulcan(Father) and Terran (Earthling Mother).

Though he would do his best to outwardly show the logical, unemotional Vulcan side, every so often, the emotional human side would peek through. Kind of like a frosted mini-wheat....

Live long and Prosper, my son.

If there are self-made purgatories, then we all have to live in them.

Five thousand quatloos that the mortgage will have to be destroyed. Sorry, couldn't resist.

But I too would agree that it is more prudent to use those funds for future Investments rather than pay off such a small percentage mortgage.

[jriding]

After maxing out all of our tax-advantaged space we split the difference with leftover money each month: 50% to extra mortgage payments and 50% to taxable accounts.

[randomizer]

At 3.125% I'd be tempted (emotionally) to pay it off and get it off the balance sheet. But my head tells me that the optimal path is to pay it off as slowly as possible. Either way, I don't think it will make a huge difference to your retirement, so just do what feels right.

[Vulcan]

One good reason to pay mortgage off early vs leaving funds in taxable accounts is to take assets off (most) college financial aid formulas.

[whodidntante]

I have exactly the same interest rate and I don't send a dime extra.

[hookemhorns]

We could easily be in a situation soon where a money market or CD pay >3%, so you could generate a risk-free net gain on your mortgage. The people saying to pay it off are not looking at the facts. Your bank will be laughing their rear off if you pay it off now.

[JoeRetire]

If keeping the mortgage for as long as possible and investing in the stock market instead is a good idea, why not refinance the mortgage up to 80% loan to value ratio every five years or so? That must be an even better idea? The more leverage you use, the higher the returns, right?

Bingo!

As long as the mortgage rate is so favorable compared to the expected investment returns, max leverage makes complete financial sense.

[m@ver1ck]

If keeping the mortgage for as long as possible and investing in the stock market instead is a good idea, why not refinance the mortgage up to 80% loan to value ratio every five years or so? That must be an even better idea? The more leverage you use, the higher the returns, right?

Bingo!

As long as the mortgage rate is so favorable compared to the expected investment returns, max leverage makes complete financial sense.

Except when the stock market drops 50%. At which point you would have been better off not having that leverage.

[grabiner]

We could easily be in a situation soon where a money market or CD pay >3%, so you could generate a risk-free net gain on your mortgage.

This would be the case only if the mortgage is deductible, which it likely isn't for the OP. A 4% taxable return would be only 3.04% after tax in the 24% tax bracket, so it is inferior to paying off a non-deductible mortgage.

The proper way to deal with the "We could easily be in the situation soon" is to compare alternatives of the same duration; the yield on long-duration bonds takes into account the possibility that short-term rates may rise. Making an extra payment on a 10-year mortgage gives you a guaranteed return 10 years from now, so the fair comparison is to a 10-year bond. If 10-year bonds yield more than the mortgage rate (after any tax comparison), then you come out ahead by buying such a bond.

The OP's rate and payment imply that there are about 24 years left on the mortgage, so any additional payment made now gives no benefit until 24 years from now, or until the house is sold. Therefore, at 3.125%, it's probably not worth paying off the loan even if it is non-deductible; 7-year municipal bonds (Admiral shares of Vanguard Long-Term Tax-Exempt) yield 2.95% for a significantly shorter duration.

And if rates fall, investing in municipal bonds instead of paying down the mortgage gives you the right to pay down the mortgage later. If it happens that munis yield 2% three years from now, then selling munis to pay down the mortgage will be a good deal.

[dknightd]

There is no right answer to this. Nobody knows what future returns might be. I have $50k (and 8 years) left on my 3.25% mortgage. I'm in no rush to pay it off early. I might decide to pay it in full one day. Reducing the amount owned does not make me feel better. Having it paid off in full likely would. YMMV

[JoeRetire]

If keeping the mortgage for as long as possible and investing in the stock market instead is a good idea, why not refinance the mortgage up to 80% loan to value ratio every five years or so? That must be an even better idea? The more leverage you use, the higher the returns, right?

Bingo!

As long as the mortgage rate is so favorable compared to the expected investment returns, max leverage makes complete financial sense.

Except when the stock market drops 50%. At which point you would have been better off not having that leverage.

I'm happy with my asset allocation. It doesn't keep me awake at night.
My assets have never dropped by 50%. I don't expect they will in my lifetime.

[jimmynohome]

A couple thoughts:

1. By way of qualifications, I'm in a similar boat as far as age/income/situation. I suppose one difference is that I have a considerably higher amount of non-retirement funds, but that really doesn't make that much of a difference, so it may be meaningful to hear from someone who is walking your walk. I have a 7 yr ARM that runs out in the next 6 months, so my days of 2.5% before tax borrowed money are numbered and this is a situation I find myself pondering a lot these days.

2. One point I haven't seen anyone make that I think is important is that your mortgage is "in the money". You could not go out and get a 15 year for 3.125% right now. I think that pretty much gives you your answer right there.

3. Your assets appear a little tilted towards retirement, which certainly isn't a bad thing but it is worth noting. You seem to be counting on the sale of your business to bridge the gap between expected retirement in your mid 50's until you can reasonable pull from your retirement funds. As they say in golf, there is a lot of green there. I think that is a dangerous expectation.

4. If the debt is just too burdensome for you to sleep at night, then by all means pay it down a bit quicker, but I would recommend more toward the extra hundred or couple hundred a month vs. laser like focus and eliminating it totally within a few years.

5. Life is uncertain, but that low rate is not uncertain. As stated in #2 above that is effectively an asset of yours.

6. I agree with the notion that the expectation of achieving historic 8-10% returns over the next 10-15 years will be challenging, and there will certainly be some down years, but realistically speaking it would be a complete anomaly for you to not achieve the after tax cost of your mortgage, which is likely close to about 2.5%. That's not to say it can't or won't happen, but it just isn't likely. If you can control the urge to spend it, and invest it in a prudent manner, then a down year is just an opportunity. It really doesn't make any difference until you sell.

Best of luck

[willthrill81]

We don't have as much in the way of retirement assets as you and we're aggressively paying off our 3.375% mortgage (about 18-20 months left). I think an argument can be made in favor of paying it off in lieu of buying bonds as well as just letting it ride and investing in something more aggressive. It's a matter of opinion and what makes you feel comfortable, hence the term 'personal finance'.

[Erwin007]

Pay it off as fast as you can,
Laser like focus.

+1000......

You 're asking this question because you hate debt.....me too. We paid ours off early also......there is no better feeling than having zero debt....

Pay it off.......at WARP SPEED!!!

The better feeling is having more money than you would have had if you had made the mathematically poor decision to pay extra to your low interest rate mortgage.

[jnet2000]

I'd pay it off. It's a great feeling being debt free and having cash and assets to boot. We paid off our mortgage in our mid 30s and have vowed never to use debt again.

[NextMil]

I have a 2.9% rate on my mortgage and I max retirement and invest in 529s. Anything leftover gets applied to mortgage and taxable on a 60/40% split respectively. Truthfully my taxable account is also my mortgage payoff investment account. I just spread the risk a little.

We chase(d) interest rates to pay less interest on our mortgages. Hate paying interest. That’s why I love paying extra on the mortgage and seeing the amount I owe to the bank decrease monthly.

So tired of this monthly payment, cannot wait for it to be gone.

[m@ver1ck]

I like the idea of paying off the giuse early rather than invest in bonds...