Pay down your Mortgage

[fiverus]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

[AerialWombat]

Why pay it down?

Stick the cash in T-bills earning 5.3%+. Profit.

[muffins14]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

I would suggest not doing it especially if it is tax-deductible at all, and Invest in stocks or bonds instead.

[MindBogler]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

I agree with not aggressively paying it down. It's better to make a separate fund and invest, especially with earning more on cash than your mortgage paydown. In a couple years if the return on cash is lower than 3.75% it might make sense to lump sum into the mortgage. That itch sometimes needs to be scratched though so if you feel compelled to do something, split the difference. I throw about $300 a month at mine and invest the rest (1-2k+). It's not optimal but it feels productive.

[fiverus]

Would you open up a brokerage account at Fidelity and put money in there?

[fiverus]

Would you open up a brokerage account at Fidelity and put money in there?

[marti038]

Depending on your lender, you may be able to pay it online and clearly direct that the funds go to paying down principle. Writing it on the check should work, but I'd call the lender to make sure you know the steps they want you to take.

And I know you didn't ask, but I agree with everyone else about investing/saving it instead. You can clear 3.75% easily right now with virtually no risk. The lowest yielding treasury today is a 10-year bond at 4.169%. T-Bills are well over 5%.

Of course, if you don't care about maximizing interest then by all means, pay it off.

[muffins14]

Would you open up a brokerage account at Fidelity and put money in there?

Sure. Vanguard, Schwab, and others, are also reasonable

[ScaledWheel]

Would you open up a brokerage account at Fidelity and put money in there?

We use Fidelity. Current rate on SPAXX (the default MM/sweeps fund) is just below 5%.

[sport]

Would you open up a brokerage account at Fidelity and put money in there?

We use Fidelity. Current rate on SPAXX (the default MM/sweeps fund) is just below 5%.

The Vanguard sweep account, VMFXX has a current yield of 5.28%

[muffins14]

Would you open up a brokerage account at Fidelity and put money in there?

We use Fidelity. Current rate on SPAXX (the default MM/sweeps fund) is just below 5%.

The Vanguard sweep account, VMFXX has a current yield of 5.28%

The best fund will be different for different people depending on their tax bracket

[AerialWombat]

Would you open up a brokerage account at Fidelity and put money in there?

A Fidelity brokerage account is where I buy my T-bills.

[ScaledWheel]

The Vanguard sweep account, VMFXX has a current yield of 5.28%

Yep, Vanguard definitely has the best rates. Fidelity takes that extra %0.25 as its expense ratio, more or less.

[srt7]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

The whole point of securing a low interest mortgage rate is to pay it down slowly. I see no point in rushing to pay it down sooner in this market where even CDs are at 5% and above.

[fiverus]

Well, I am 65 and I would like to not have a mortgage payment or at least reduce the amount owed.
I'm in a 2 story townhome now, but my plan is to sell in a couple of years to a ranch style townhome and
have a lower mortgage payment. I owe about 103k.

[cmr79]

Well, I am 65 and I would like to not have a mortgage payment or at least reduce the amount owed.
I'm in a 2 story townhome now, but my plan is to sell in a couple of years to a ranch style townhome and
have a lower mortgage payment. I owe about 103k.

There isn't much benefit to you paying down the mortgage if you intend to sell in a few years (at which point it will be paid off anyway). If you can get an essentially risk-free return on your money above what you would save on the mortgage interest by parking the extra cash in a CD or savings account, you may even have more flexibility in purchasing your next home as that cash will already be on hand prior to finalizing the sale of your current house.

[yatesd]

I'll offer one counterpoint. If you know there is a chance you could spend the saved money on something else (car, vacation, etc.), and you don't have substantially more than you already need, then paying down could be better. Especially since you might be on a fixed income or nearing fixed income status.

[fiverus]

When I move in a couple of years my mortgage will not be paid off. Nor will it be when I retire in say 4-5 years. I owe $103k
I'm in 12% tax bracket.

Is there a bit of a risk fund you suggest where I can get pretty decent return in 1-2 years? Say if I put $3k in a riskier fund for a short period of time.
Then sell it.

[alex_686]

Well, I am 65 and I would like to not have a mortgage payment or at least reduce the amount owed.
I'm in a 2 story townhome now, but my plan is to sell in a couple of years to a ranch style townhome and
have a lower mortgage payment. I owe about 103k.

From a strictly rational viewpoint it is better to purchase short term Treasuries or CDs. You will always have greater wealth.

However I understand the emotional benefit of paying down your mortgage. You don’t have to overthink this. Any amount over the required payment goes towards your principal.

[Outer Marker]

When I move in a couple of years my mortgage will not be paid off. Nor will it be when I retire in say 4-5 years. I owe $103k
I'm in 12% tax bracket.

Is there a bit of a risk fund you suggest where I can get pretty decent return in 1-2 years? Say if I put $3k in a riskier fund for a short period of time.
Then sell it.

Just put it your extra money in CD's, Tbills, Federal Money Market, or other risk-free investment. It's not hard to get over 5% with no risk. It's literally free money vs. paying down the 3.75% mortgage. It makes no difference when you move or retire. Pre-paying the mortgage is not optimal.

[fiverus]

Do you have suggestions what CD's, T-Bills to purchase? And where?
How does CD's and T-Bills work? Say, I buy for $1000 and how long before I can cash it in?

[Dottie57]

My vote goes to paying down the loan. I hated having a large monetary commitment for each paycheck. I decided to pay the loan off early. Paid it off in 17 yrs. The payoff year was 2004. When great recession came around, I didn’t have to worry about a mortgage payment.

[Jeep512]

I agree with the others - keep it in cash, and get ~5%.

"Cash is King"...it will give you flexibility in retirement for health expenses, vacations, etc. I understand the emotional desire to pay down or pay off your mortgage, but the logical play is to put the cash to work.

[fiverus]

What CD's do you suggest? Where do I purchase a CD?
I'm not familiar with CD's and how they work

[MathWizard]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

Any extra payments will count against principal.

Are you maxing Roth IRA(s)?

The reason not to pay down is more important than the fact that this is a low interest rate. The issue is cash flow .

If you pay an extra payment's worth this month, they still expect a payment, you can't pay ahead and then stop if needed .

If you pay down the loan, and lose your job, you could lose the house.
If instead you place the extra money where you can access it if needed, either taxable or Roth contributions, then in case of job loss, you can make the necessary mortgage payments.

If you haven't maxed your Roth IRAs, that space is better than taxable, and you can access the contributions at any time without taxes or penalties.

[Outer Marker]

What CD's do you suggest? Where do I purchase a CD?
I'm not familiar with CD's and how they work

You can open an online CD with any of the big providers - Marcus, Ally, Citizen's Access etc. in less than 10 minutes. Just shop around for the best rate and term you want. e.g. you deposit $10,000 for 18 months, and get your money back, plus 5% interest at the end of the term. https://www.marcus.com/us/en/savings/hi ... lsrc=aw.ds

If you already have a Vanguard account, I'd just put your extra funds in Federal Money Market paying 5.3%. If you have, say, $10,000 that you were planning to prepay towards your mortgage, you'll make an extra $150 this year in interest. Its not a huge differnce, but the price of the nice dinner that you might as well enjoy as the bank. On a larger mortgage balance, the difference is a lot more. I have a $600,000 balance at 2.125% that I could pay off, but I chose to bank the money instead and pay the mortgage on schedule, which generates an additional $18,000 in "free" money annually.

[bd7]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

Typically if you overpay they just apply it to principal anyway, but your statement or coupon that you return with the check should have a box to check and place to write in the amount you want applied as well.

What is your marginal tax rate (state/federal) and are you able to effectively deduct your mortgage interest or are you taking the standard deduction? Note that even if you itemize, the marginal benefit of your mortgage deduction may be smaller than you think. The net profit margin of the sort of MMF/T-bill arbitrage others are proposing may be small or nonexistent.

[fiverus]

Just opened a CD at Ally. Awesome. Thank you everyone for your suggestions!

[guyfromct]

Would you open up a brokerage account at Fidelity and put money in there?

We use Fidelity. Current rate on SPAXX (the default MM/sweeps fund) is just below 5%.

The Vanguard sweep account, VMFXX has a current yield of 5.28%

The best fund will be different for different people depending on their tax bracket

And state of residence

[Nohbdy]

I’ll dissent and offer that I think it is possible that paying off the mortgage at 3.75% might be better than a 5% CD because the CD is probably taxable and in some states total tax could be over 50%. If the mortgage were paid off, it might be possible to incur less taxable income in the future by reducing monthly expenses. Payoff may also facilitate qualifying for some tax credits.

So for an extreme example if you have a $100k mortgage and you have $100k in cash while pulling $1mil / year from a taxable retirement account I think paying off the mortgage would be the winner.

I’m not saying that this is likely, but I don’t think the OP provided enough information.

It depends on tax rate now and in the future because the mortgage payoff could reduce the need to incur taxable income in the future.

[doobiedoo]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

I paid off my mortgage in 9 years.

Depending on the loan servicing agent (which often changed after a refinance), I sometimes wrote separate additional checks for principal only, wrote "extra to principal" on the "For" line of the check, or called the service center to specify that extra payments go to principal automatically (and not be held for future payments). By luck, my last loan servicing agent applied extra funds to principal automatically unless directed otherwise.

See what the fine print in your loan docs say, or call the loan servicer.

[aerosurfer]

Just opened a CD at Ally. Awesome. Thank you everyone for your suggestions!

Ally is great! Has been my primary bank for years. Always near the top of competitive rates, but an absolutely idiotproof website and easy to use platform.

[howard71]

I completely soured on the idea of paying down the mortgage after reading the book "Liar's Poker" by Michael Lewis.

He once worked as a bond trader and he describes how his company came up with algorithms to predict what homeowners were likely to pay off their mortgages early. Then then acquired these mortgages and sold them to the highest bidder because they represented a windfall for the banks holding the mortgage.

And the bond traders viewed the homeowners who did this as suckers.

[vested1]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

[Outer Marker]

OP made 100% the right choice to invest in a higher rate CD vs paying down the mortgage. It's simple math and free arbitrage. If OP ever wants to have less mortgage, he can just cash the CD and pay down the mortgage. That optionality does not exist the other way around.

[pizzy]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

Why are you assuming the early payoff funds wouldn’t have existed if you didn’t use them to pay off the mortgage?

In other words, you would have had less equity when you sold, but you would have had more savings.

[cabfranc]

Are you paying your mortgage my mailing a paper check? I can't imagine that you cannot pay online and also pay extra principal online. That's what we do. The website allows you to may a payment at any time for any amount and indicate that it is for extra principal.

[vested1]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

Why are you assuming the early payoff funds wouldn’t have existed if you didn’t use them to pay off the mortgage?

In other words, you would have had less equity when you sold, but you would have had more savings.

That is the familiar argument I hear every time I relate this experience. This assumes that you know exactly how the markets will perform in the short term. What if the time frame would have been 2008, or 2011, or 2021? The one thing I knew because I had run the numbers through an amortization calculator was the amount of mortgage balance remaining at different points, and how much would be going to interest vs principal at progressive dates.

The point is, it gave me options I wouldn't have had if I'd done nothing. If my assumptions of my MIL's longevity or the marketability of our home was off, at least I knew how much our expenses would drop once the mortgage was paid off. We were retired, so it wasn't like we had earned income to invest from payroll deductions. I was also delaying SS until age 70, so it all went into the mix. My wife had a 30k pension, filed for SS at age 65 when I turned 66 simultaneously, and I filed a restricted application for 1/2 of her PIA until I turned 70 last year and filed for my maximum benefit.

I will also add that tax considerations were made to stay under the 12% federal and 8% state we were paying. This also reduced the portfolio balance subject to RMD's, rather than converting TIRA to Roth.

Now we don't need to withdraw anything from savings until my RMD in 2025, and haven't taken a withdrawal for 1.5 years. We also don't have a mortgage and have about 4k extra a month after expenses are paid. Making assumptions on market gain is often criticized on this forum, and rightfully so. But for some odd reason, assumptions of healthy portfolio gain as compared to paying off a mortgage, or filing early for SS and investing a smaller benefit seems to duck that criticism most of the time. To each his/her own. More than one road, and all that.

[pizzy]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

Why are you assuming the early payoff funds wouldn’t have existed if you didn’t use them to pay off the mortgage?

In other words, you would have had less equity when you sold, but you would have had more savings.

That is the familiar argument I hear every time I relate this experience. This assumes that you know exactly how the markets will perform in the short term. What if the time frame would have been 2008, or 2011, or 2021? The one thing I knew because I had run the numbers through an amortization calculator was the amount of mortgage balance remaining at different points, and how much would be going to interest vs principal at progressive dates.

The point is, it gave me options I wouldn't have had if I'd done nothing. If my assumptions of my MIL's longevity or the marketability of our home was off, at least I knew how much our expenses would drop once the mortgage was paid off. We were retired, so it wasn't like we had earned income to invest from payroll deductions. I was also delaying SS until age 70, so it all went into the mix. My wife had a 30k pension, filed for SS at age 65 when I turned 66 simultaneously, and I filed a restricted application for 1/2 of her PIA until I turned 70 last year and filed for my maximum benefit.

Now we don't need to withdraw anything from savings until my RMD in 2025, and haven't taken a withdrawal for 1.5 years. We also don't have a mortgage and have about 4k extra a month after expenses are paid. Making assumptions on market gain is often criticized on this forum, and rightfully so. But for some odd reason, assumptions of healthy portfolio gain as compared to paying off a mortgage, or filing early for SS and investing a smaller benefit seems to duck that criticism most of the time. To each his/her own. More than one road, and all that.

I never said the funds you used to pay down mortgage had to be invested in the market.

But to say you had more money because you increased your equity is true with the major caveat being you would have had a similar amount of money (and maybe more) if you hadn’t.

[Outer Marker]

That is the familiar argument I hear every time I relate this experience. This assumes that you know exactly how the markets will perform in the short term. What if the time frame would have been 2008, or 2011, or 2021? The one thing I knew because I had run the numbers through an amortization calculator was the amount of mortgage balance remaining at different points, and how much would be going to interest vs principal at progressive dates.

The point is, it gave me options I wouldn't have had if I'd done nothing.

That's false. OP is investing in a CD paying 5% vs a Mortgage costing 3% -- not the market. We know for 100% certainty he will have more money at the end of the CD term with option 1 vs. option 2.

In addition, you have more options with the CD vs. paydown. You have liquidity with the CD and can be used either payoff the mortgage at any time or keep the money invested. If you pay off the mortgage, you have lost your liquidity.

I can see absolutely no argument in favor of paying down the mortgage vs. higher yielding FDIC insured investments.

[vested1]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

Why are you assuming the early payoff funds wouldn’t have existed if you didn’t use them to pay off the mortgage?

In other words, you would have had less equity when you sold, but you would have had more savings.

That is the familiar argument I hear every time I relate this experience. This assumes that you know exactly how the markets will perform in the short term. What if the time frame would have been 2008, or 2011, or 2021? The one thing I knew because I had run the numbers through an amortization calculator was the amount of mortgage balance remaining at different points, and how much would be going to interest vs principal at progressive dates.

The point is, it gave me options I wouldn't have had if I'd done nothing. If my assumptions of my MIL's longevity or the marketability of our home was off, at least I knew how much our expenses would drop once the mortgage was paid off. We were retired, so it wasn't like we had earned income to invest from payroll deductions. I was also delaying SS until age 70, so it all went into the mix. My wife had a 30k pension, filed for SS at age 65 when I turned 66 simultaneously, and I filed a restricted application for 1/2 of her PIA until I turned 70 last year and filed for my maximum benefit.

Now we don't need to withdraw anything from savings until my RMD in 2025, and haven't taken a withdrawal for 1.5 years. We also don't have a mortgage and have about 4k extra a month after expenses are paid. Making assumptions on market gain is often criticized on this forum, and rightfully so. But for some odd reason, assumptions of healthy portfolio gain as compared to paying off a mortgage, or filing early for SS and investing a smaller benefit seems to duck that criticism most of the time. To each his/her own. More than one road, and all that.

I never said the funds you used to pay down mortgage had to be invested in the market.

But to say you had more money because you increased your equity is true with the major caveat being you would have had a similar amount of money (and maybe more) if you hadn’t.

Except you are ignoring a couple of facts that may not apply to you. If I had the same amount of money when buying a new house I would be counting TIRA withdrawals that are taxable. I didn't want another mortgage, and 100k lump sum out of our TIRA's in one year to buy the same house, added to our other income would have increased our taxes and pushed us into IRMAA territory.

Remember, I calculated tax liability too, and projected our tax liability out several years, adding the lump sum amounts going toward principal in taxable income. In that way I was able to spread the liability out over 3 years, rather than one, keep our taxes low, and staying out of IRMAA territory. My CPA daughter confirmed all the numbers before I initiated the plan.

[vested1]

That is the familiar argument I hear every time I relate this experience. This assumes that you know exactly how the markets will perform in the short term. What if the time frame would have been 2008, or 2011, or 2021? The one thing I knew because I had run the numbers through an amortization calculator was the amount of mortgage balance remaining at different points, and how much would be going to interest vs principal at progressive dates.

The point is, it gave me options I wouldn't have had if I'd done nothing.

That's false. OP is investing in a CD paying 5% vs a Mortgage costing 3% -- not the market. We know for 100% certainty he will have more money at the end of the CD term with option 1 vs. option 2.

In addition, you have more options with the CD vs. paydown. You have liquidity with the CD and can be used either payoff the mortgage at any time or keep the money invested. If you pay off the mortgage, you have lost your liquidity.

I can see absolutely no argument in favor of paying down the mortgage vs. higher yielding FDIC insured investments.

It may be false for him, but the example I gave was for me as proof that circumstances may be different, and may lead to different conclusions. Interest rates in 2016 when I initiated my plan were not 5%. Additionally, why would I sell stocks in my TIRA that were doing great in 2016 to buy a CD paying 5%, if I could find one in 2016? We were 60/40 in retirement at that time. Now we are 70/30, and the amount used to pay down the mortgage has been replaced and then some by gain during the last 1.5 years when we haven't withdrawn anything from TIRA's.

[Outer Marker]

It may be false for him, but the example I gave was for me as proof that circumstances may be different, and may lead to different conclusions. Interest rates in 2016 when I initiated my plan were not 5%. Additionally, why would I sell stocks in my TIRA that were doing great in 2016 to buy a CD paying 5%, if I could find one in 2016? We were 60/40 in retirement at that time. Now we are 70/30, and the amount used to pay down the mortgage has been replaced and then some by gain during the last 1.5 years when we haven't withdrawn anything from TIRA's.

Don't get me wrong - I'm normally a strong "pay off the mortgage" guy - but in the current rate environment it makes absolutely no sense.

The relevant comparison in mortgage payoff is the mortgage interest rate vs. 100% safe guaranteed investment alternatives not the stock market. Don't confuse this with using the mortgage as leverage to invest in the market. That may be a viable strategy, but it is not the same comparison.

If you have the option of investing in a 5% CD vs. paying off a 3% mortgage, it is simple and obvious math which is the better choice. I'm sure your CPA daughter would agree. (Note that OP is in the 12% bracket, and is likely not deducting mortgage interest, which could come into play in some situations.)

If you change the prevailing interest rate assumptions, the math is very different. It would make sense to pay off a mortgage in 2016 if, say, your mortgage was at 5% and CDs were paying 3%. That is not the case here.

[vested1]

It may be false for him, but the example I gave was for me as proof that circumstances may be different, and may lead to different conclusions. Interest rates in 2016 when I initiated my plan were not 5%. Additionally, why would I sell stocks in my TIRA that were doing great in 2016 to buy a CD paying 5%, if I could find one in 2016? We were 60/40 in retirement at that time. Now we are 70/30, and the amount used to pay down the mortgage has been replaced and then some by gain during the last 1.5 years when we haven't withdrawn anything from TIRA's.

Don't get me wrong - I'm normally a strong "pay off the mortgage" guy - but in the current rate environment it makes absolutely no sense.

The relevant comparison in mortgage payoff is the mortgage interest rate vs. 100% safe guaranteed investment alternatives not the stock market. Don't confuse this with using the mortgage as leverage to invest in the market. That may be a viable strategy, but it is not the same comparison.

If you have the option of investing in a 5% CD vs. paying off a 3% mortgage, it is simple and obvious math which is the better choice. I'm sure your CPA daughter would agree. (Note that OP is in the 12% bracket, and is likely not deducting mortgage interest, which could come into play in some situations.)

If you change the prevailing interest rate assumptions, the math is very different. It would make sense to pay off a mortgage in 2016 if, say, your mortgage was at 5% and CDs were paying 3%. That is not the case here.

We too were in the 12% tax bracket and unable to deduct mortgage interest in 2016. Our loan was at 4.5% with 20 years remaining, scheduled to be paid off at age 85 with regular payments. The 90k of lump sum payments I withdrew from TIRA's over 3 tax years reduced the amount owed by 100k due to increased principal amounts beginning immediately after each lump sum payment. The reduction of principal owed would have accelerated with each passing lump sum payment as well, if we would have had to wait longer to sell the house.

It was all part of the plan, but there were still unknowns to deal with. We didn't know how long my MIL would live. I didn't know how much our house would sell for or if it would even sell. I didn't know how much we would have to spend on a new upgraded house in a different LCOL state on the opposite coast. We didn't know how leaving our children and grandchildren on one coast and moving near other children and grandchildren on the opposite coast would work out. We didn't know if one of us would drop dead the next day.

The only thing we knew for sure is that paying off the mortgage would reduce expenses by about 30% and increase options if things went our way, and luckily they did. Not needing savings withdrawals for almost 4 years will (may) allow our children to get a better inheritance. Selling our house if we die tomorrow, tax free, will also help them out. Our 70% current investment in VTI and 30% in CD's and high yield MM, all yielding over 5% feels very safe. If we still had a mortgage that feeling would be somewhat tempered.

[Outer Marker]

We too were in the 12% tax bracket and unable to deduct mortgage interest in 2016. Our loan was at 4.5% with 20 years remaining, scheduled to be paid off at age 85 with regular payments. The 90k of lump sum payments I withdrew from TIRA's over 3 tax years reduced the amount owed by 100k due to increased principal amounts beginning immediately after each lump sum payment. The reduction of principal owed would have accelerated with each passing lump sum payment as well, if we would have had to wait longer to sell the house.
<snip>
The only thing we knew for sure is that paying off the mortgage would reduce expenses by about 30% and increase options if things went our way, and luckily they did. Not needing savings withdrawals for almost 4 years will (may) allow our children to get a better inheritance. Selling our house if we die tomorrow, tax free, will also help them out. Our 70% current investment in VTI and 30% in CD's and high yield MM, all yielding over 5% feels very safe. If we still had a mortgage that feeling would be somewhat tempered.

I'm glad it worked out for you, and that was probably a good decision at the time since your mortgage rate was likely above what you could earn in CD's or money market. The compounding of interest on CD's works exactly the same as the decrease in interest on mortgage payments. It's simply a function of the outstanding or deposit balance, respectively.

As noted above, I'd wanted a paid off mortgage before retirement to reduce the demands on my portfolio, but I can earn an additional $18,000 a year in completely risk-free money simply by holding the money in CD's vs. paying off the mortgage. It would be silly to pay off a mortgage that is effectively paying me money to keep it.

[JoeyJoeJoe]

I had this mindset with a similar mortgage rate: debt bad! kill all debt!

Then I did some back of the envelope math and realized I had a pretty good thing with my 3.125% rate and then started to shovel in extra cash into assets with a return higher than 3.125%.

Unless there is some circumstance I don't understand I would suggest you learn from my mistake, make the minimum payments and tuck the rest into your future.

JJJ

[iljets10]

Since the decision has already been made, a dissenting opinion is moot, but the borrower's age and mortgage length remaining can be a factor.

We had plans to sell our house and move in a few years but owed more on the house than we had bought it for 24 years earlier due to a messy divorce, remodels etc. Our newest refi at 4.5% had 20 years left on it at my age of 65, so with regular payments it would be paid off when I was 85 (my wife 84). We owed 195k on a loan that was originally 185k. Sometimes life intervenes, and decisions made while young don't always add to your net worth.

We were also the only remaining local relatives of my MIL, who was in a skilled nursing facility, with all of my wife's siblings having moved to far flung locations of the U.S. We didn't feel we could move with her still alive in her early 90's and didn't know if our desire to sell the house would match it's ability to sell. So we made a plan that we had no idea when or if it could be achieved. We were both retired and not drawing SS yet at 64/65. We had about 1 mil saved but overall it looked kind of bleak, living in a 50 year old rancher on a postage stamp lot with irritating neighbors on one side, and no way to upgrade in California without getting another mortgage.

I decided that discretion was not the better part of valor and came up with a plan to pay off the mortgage, running it by my daughter who was a CPA. I wore out an online amortization calculator and initiated lump sum payments over 2.5 years that took 100k off the loan and immediately lowered interest as compared to principal as soon as the payments posted. I never increased the amount of regular mortgage payments, but went to the bank in person to pay 30k or more cash installments against principal on the mortgage.

Two things happened. My MIL died at 94, making it possible to move, and an upswing in existing home sales with little inventory made our home more desirable. We put my MIL's condo on the market, which sold over asking on the first weekend, then put our house on the market which did the same, 30k over what our very experienced agent said it would go for, and 10k more than I insisted on listing it for. We paid less of a negotiated commission with the promise to sell both houses through her.

Because of the 100k lower mortgage amount we had more equity, and with remodel expenses and commissions deducted we were just under the 500k capital gains exclusion, so all the gain was tax free, about 625k. We used that cash and our portion of the proceeds from the sale of my MIL's condo to buy a better house than we had ever dreamed we could for cash in a LCOL state on a lake with 6 figures left over. WE sold that house after a remodel just over 2 years later, got the capital gains exclusion again, made about 36% net profit, and bought an even nicer and much newer home for cash with another 6 figures left over.

If we hadn't done the early payoff plan we wouldn't have been able to afford such nice houses without getting another mortgage. My plan was designed to pay off the loan in 6 years, rather than 20 if my MIL continued to live and if the house had been difficult to sell. Sometimes you get lucky, (not including my MIL's death of course).

Why are you assuming the early payoff funds wouldn’t have existed if you didn’t use them to pay off the mortgage?

In other words, you would have had less equity when you sold, but you would have had more savings.

Also, rates were mostly zero until 2022, so your story is irrelevant as the facts now are different.

[LittleMaggieMae]

Looking for suggestions to pay down my mortgage.

My interest rate is 3.75%. Sending the back a separate check each month, marked PAY-DOWN OF PRINCICPAL?

To answer your question:
If you are mailing your required payment every month (you wouldn't be asking this question if you were paying your mortgage online) - I would examine your mortgage statement (the one with the part that you mail in with your payment that you get every month).
There may be some words/instructions about making additional principal payments. If your monthly paper statement doesn't have any info - I would recommend calling the mortgage company and asking how to make additional principal payments.

I had a mortgage and when I added a couple of hundred to the monthly amount I was paying - the mortgage lender applied the extra money as paying future required mortgage payments - and NOT reducing principal. I figured out MY mistake after making 3 payments. I did call the lender to clarify how to make principal payments. There was a TINY check box on the paper payment stub that I needed to check to indicate that extra money went to principal (and not to future payments or to escrow - future payments was the default if no TINY check box was checked). I then opted to not make 3 mortgage payments without any penalty (I was assured no penalty) to get back on track. (this actually helped me out as I had an unexpected big expense and so not having to make 3 months of mortgage payments let me re-direct that money to the "problem issue" with little stress/drama. so it had a small bright side.)

If you pay your mortgage electronically (automatically) you may have the same "TINY check box" issue (is extra escrow? principal? something else?) so be sure to pay attention and go at setting up the transaction with extra money goes to principal. (I've got 3 mortgages with 3 different banks and their online auto mortgage payment process is different (but does the same things). )

And finally, unless you have some important personal reason for paying down your mortgage I would not pay down a 3.75% mortgage. OK, I would probably round up the payment amount... I like round numbers. But I wouldn't pay it down ala Dave Ramsey's advice or anyone who's telling you that to be truly debt free you must not have a mortgage. Being truly debt free can be very costly (in loss of liquidity and loss of being able to take advantage of other types of wealth building opportunities.)

[Nohbdy]

We too were in the 12% tax bracket and unable to deduct mortgage interest in 2016. Our loan was at 4.5% with 20 years remaining, scheduled to be paid off at age 85 with regular payments. The 90k of lump sum payments I withdrew from TIRA's over 3 tax years reduced the amount owed by 100k due to increased principal amounts beginning immediately after each lump sum payment. The reduction of principal owed would have accelerated with each passing lump sum payment as well, if we would have had to wait longer to sell the house.
<snip>
The only thing we knew for sure is that paying off the mortgage would reduce expenses by about 30% and increase options if things went our way, and luckily they did. Not needing savings withdrawals for almost 4 years will (may) allow our children to get a better inheritance. Selling our house if we die tomorrow, tax free, will also help them out. Our 70% current investment in VTI and 30% in CD's and high yield MM, all yielding over 5% feels very safe. If we still had a mortgage that feeling would be somewhat tempered.

I'm glad it worked out for you, and that was probably a good decision at the time since your mortgage rate was likely above what you could earn in CD's or money market. The compounding of interest on CD's works exactly the same as the decrease in interest on mortgage payments. It's simply a function of the outstanding or deposit balance, respectively.

As noted above, I'd wanted a paid off mortgage before retirement to reduce the demands on my portfolio, but I can earn an additional $18,000 a year in completely risk-free money simply by holding the money in CD's vs. paying off the mortgage. It would be silly to pay off a mortgage that is effectively paying me money to keep it.

I think it depends on whether the spread is sufficient to cover the taxes that you pay on the CDs.

If you have to draw from a 401k to cover the mortgage then once it is paid off you have reduced your need for taxable income.

The mortgage payoff is a tax free return. Is the CD tax free income for you?

[fiverus]

Yes, CD is tax free income. I called Ally to double check this. It's a high yield CD of 5%. I'm just learning about CD's.
The key is to add more money to the CD once it matures in 9mos so I get more of a return.

My mortgage interest rate is 3.375%