6.5% Mortgage / Pay Off

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Pridegi
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Joined: Wed Oct 30, 2024 9:51 am

6.5% Mortgage / Pay Off

Post by Pridegi »

Is it worth paying down my mortgage 6.5%?

Income- about 180-185k
House- about 620k
Mortgage- 297k (7 ARM @ 6.5%)
Taxable Account - $200,000 - currently invested in a money market fund earning 4.75%. I have been invested in the market at various points, but am too risk averse to just leave it in there. I pulled out last April. Big mistake.
Retirement - $320k across dc and Roth

I’m 39 years old. Should I take most of the 200k and lock in savings of 6.5% a year?
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mhc
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Re: 6.5% Mortgage / Pay Off

Post by mhc »

Welcome to the forum!

Before you pay down the mortgage, make sure you have an adequate emergency fund (EF). Also, make sure that paying down the mortgage will not create a cash flow issue. Then, you would be better off to pay down the mortgage than having you money in a MMF.

You may want to spend some time reading the Wiki. Here is a place to start: https://www.bogleheads.org/wiki/Getting_started
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invest4
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Re: 6.5% Mortgage / Pay Off

Post by invest4 »

Welcome!

Your mortgage is not large relative to your income...and have technically already paid off half if the current home value is reasonably accurate.

I would wait and see what happens with interest rates and would suggest you be more interested in what you are doing with your portfolio and how to avoid bad behaviors like selling investments because you are uncomfortable.

I would strongly encourage you to post your portfolio utilizing the link below to get a better handle on where you are and where you are going as far as financial independence:

https://www.bogleheads.org/wiki/Asking_ ... _questions
Striker
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Re: 6.5% Mortgage / Pay Off

Post by Striker »

If you can’t currently max out retirement accounts
because of the mortgage payment, I would consider it.
Outer Marker
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Re: 6.5% Mortgage / Pay Off

Post by Outer Marker »

Pridegi wrote: Wed Oct 30, 2024 9:57 am Mortgage- 297k (7 ARM @ 6.5%)
Taxable Account - $200,000 - currently invested in a money market fund earning 4.75%. I have been invested in the market at various points, but am too risk averse to just leave it in there. I pulled out last April. Big mistake.
At 6.5% -- and especially if you have market jitters, I can't think of a better use for your $200K than paying down the mortgage.

Vanguard projected U.S. equities to return only about 3-5% over the next 10 years - so your mortgage payoff would be earning more at no risk. I would make sure you maintain adequate liquidity. Perhaps $50K held back in cash.
KlangFool
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Re: 6.5% Mortgage / Pay Off

Post by KlangFool »

Pridegi wrote: Wed Oct 30, 2024 9:57 am Is it worth paying down my mortgage 6.5%?

Income- about 180-185k
House- about 620k
Mortgage- 297k (7 ARM @ 6.5%)
Taxable Account - $200,000 - currently invested in a money market fund earning 4.75%. I have been invested in the market at various points, but am too risk averse to just leave it in there. I pulled out last April. Big mistake.
Retirement - $320k across dc and Roth

I’m 39 years old. Should I take most of the 200k and lock in savings of 6.5% a year?
OP,

A) It is not safe to pay off your mortgage. Your portfolio is too small as compared to your house. It is not safe to put more money into your house.

B) What is the purchase price of your house? 620K.

C) How can you pay off the 297K mortgage when you have only 200K in your taxable account?

D) What is your current annual expense?

E) What is your current mortgage payment?

F) What is your annual savings/investment?

G) If you pay off the mortgage and you are unemployed in the coming recession, how long can you survive?

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Meg77
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Re: 6.5% Mortgage / Pay Off

Post by Meg77 »

I would use the excess cash to max out your 401k, HSA and Roth IRA first, if you aren't doing that already.

After that, excess cash should be held aside for short-mid term goals/spending plans (wedding, car or home upgrade, kids' college, anything you can't cash flow but want/need within the next 5 years).

After that I'd have 6-12 months of expenses in cash, depending on the safety of your job/industry/income.

THEN excess cash should either be invested or used to pay down debt. If you are jittery about leaving that money invested, as you'd demonstrated you were last year, then absolutely throw any excess cash reserves and ongoing excess cash flow to the loan. 6.5% is a perfectly good guaranteed rate of return. Definitely better than having 6 figures too much in a money market.
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LittleMaggieMae
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Re: 6.5% Mortgage / Pay Off

Post by LittleMaggieMae »

Pridegi wrote: Wed Oct 30, 2024 9:57 am Is it worth paying down my mortgage 6.5%?

Income- about 180-185k
House- about 620k
Mortgage- 297k (7 ARM @ 6.5%)
Taxable Account - $200,000 - currently invested in a money market fund earning 4.75%. I have been invested in the market at various points, but am too risk averse to just leave it in there. I pulled out last April. Big mistake.
Retirement - $320k across dc and Roth

I’m 39 years old. Should I take most of the 200k and lock in savings of 6.5% a year?
My hindsight says you should NOT pay off the mortgage. In theory, you are a couple of years into the 7 ARM @ 6.5% which means you have already put a heck ton of money into your house (more than 20%). I would NOT want to have more money locked up in such a big illiquid asset (your house) than you had available to invest/emergency fund. You should come up with a plan for what you will do and how you will do it when the ARM will reset.

At 39 you need to come up with some sort of investing plan and what kind of risks you are comfortable with (the market goes up and down). At 39 you need to start thinking about what you want your retirement to look like and how you will get there (via your investing plan). You need to either get comfortable with the short term markets ups and downs (with money invested in typical Boglehead approved funds) OR realize you might never be able to "save enough" to continue your current lifestyle in retirement using only conservative safe investments.

You need to be coming up with a 5, 10, 15 year plan. And for the record - "I will until I die" is not really a plan. Actually, "I will work until I'm 65" is also not a plan. While both of those absolve you from ever having to think about your finances until you are unable to work and or until you are 64.5years old they won't really help you get to a comfortable retirement. I will get off my soap box. I hear my younger relatives say those things. I think it's to avoid scrutizing their lifestyles and/or thinking about how they could influence their future by making small changes now.

I have some examples of friends were too conservative with their savings/investments during their working years who retired. The first 5 years of retirement were fine - but they didn't count on regular inflation (2 to 3% per year) or the fact that cars, new roofs, house maintenance , property taxes, insurance, utility cost always creep up... and now they are feeling a pinch and their 'nest egg' isn't going as far as they expected. And no part of their 'nest egg' is invested because they can't bare "lose money". :(

Find some peace with investing some of your money.

That is my advice for someone who is a conservative saver and is under 60 years old.
capran
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Re: 6.5% Mortgage / Pay Off

Post by capran »

Hindsight is often 20/20. We always felt like paying down (and off) the mortgage did 2 things. It basically guaranteed we would "save" the percentage of the interest we paid. And if there was a low or no mortgage, a surviving spouse could keep the home. But I suspect given the above trend market performance, you will not find many here that agree with that strategy.

Of course, i was jaded by when my investing in the market began (in late 99). We had just rolled over a substantial portfolio that had been in fixed investments. Despite "dollar cost averaging" throughout that time period, on 8-30-2000 our balance was 440k. On 9-30-2002 we hit 237k. We continued to fund our Roths to the max as well as 403b max contributions every year. (Not sure of the total of new contributions in those 4 years but I suspect it was at least another 250k). Our balance hit 439k on 3/31/04. Sure, it kept going up until the meltdown of 08-09, but the one thing I always felt good about was not having a house payment. (bought our last home in 1993 and paid it off in 1997). After the house was paid off, it really did feel like money grew on trees!

Depending on your job security, you should have an emergency fund. We thought we were secure in our jobs with 26 and 22 years seniority with continuing contracts. The district tried to give a message to the state legislature by laying off nearly every support specialist. Even if they would have not hired most of us back, we would have been fine with no house payment and a substantial portfolio.
carminered2019
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Re: 6.5% Mortgage / Pay Off

Post by carminered2019 »

Yes, pay it off because you are "risk adverse" to be in the market.
Silk McCue
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Re: 6.5% Mortgage / Pay Off

Post by Silk McCue »

carminered2019 wrote: Wed Oct 30, 2024 4:42 pm Yes, pay it off because you are "risk adverse" to be in the market.
At age 39 they should get over being risk averse so that they can have a successful financial future.

Cheers
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grabiner
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Re: 6.5% Mortgage / Pay Off

Post by grabiner »

If you are single, you are probably in the 24% tax bracket, and any paydown eliminates deductible interest, so you get a 4.94% after-tax return on a mortgage prepayment. If you are married, you are probably in the 22% tax bracket, so you get a 5.07% return, and you would still be paying down mostly deductible interest. Since that is close to what you can earn on low-risk investments in your retirement accounts, you should max those out first. This costs you a small amount in current low-risk returns, but gives you a long-term benefit in more tax-advantaged savings.

Once you have done that, you have to decide how much you value liquidity. Given the large difference between low-risk returns on a mortgage payment and taxable investing, I would prefer paying down the mortgage and keeping only an emergency fund in a taxable account.
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grkmec
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Re: 6.5% Mortgage / Pay Off

Post by grkmec »

You already know the answer. You are too risk averse to allocate your money into the market therefore your asset returns will always underperform the cost of your mortgage. So divert all your money to paying off your 6.5% mortgage. And once your mortgage balance is zero, ask yourself what’s more risky: being in the market or having your savings eroded by inflation.
mortfree
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Re: 6.5% Mortgage / Pay Off

Post by mortfree »

Do you realize that a simple invested portfolio can eventually earn more in one year than you will pay in interest over the life of the loan?

Of course it can also lose that much too but history has always been trending upwards.

Think big picture.
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MillennialFinance19
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Re: 6.5% Mortgage / Pay Off

Post by MillennialFinance19 »

Paying off your mortgage seems like solving the symptom rather than the underlying problem. I’d try to develop a good strategy to invest long term while still being able to sleep at night. We can help!
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grabiner
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Re: 6.5% Mortgage / Pay Off

Post by grabiner »

mortfree wrote: Thu Oct 31, 2024 3:32 am Do you realize that a simple invested portfolio can eventually earn more in one year than you will pay in interest over the life of the loan?

Of course it can also lose that much too but history has always been trending upwards.
(This isn't the right comparison because of the time value of money; if you save $1000 this year and lose $2000 twenty years from now, you are better off because the $1000 saved this year can be invested. However, the main principle that stocks are likely to outperform bonds is correct.)

The same argument also applies to any money you don't have invested in the stock market; you expect to earn more if you move more into the stock market.

But few investors have 100% of their money in the stock market, because of the risk involved. And the OP does not have the risk tolerance for an investment of 100% stock, as confirmed by their behavior; I don't think you would be recommending it.

If you have both fixed income and a loan, as the OP does, you have the option of selling fixed income to pay down the loan. This may be a net gain or loss, but whether it is a gain or loss is independent of the stock market. In the OP's case, I believe it is a net gain to max out a 401(k) and IRA in preference to paying down the mortgage, but a large net gain to pay down the mortgage in preference to taxable investing.
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Dude2
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Re: 6.5% Mortgage / Pay Off

Post by Dude2 »

What I do is put some money in taxable in Vanguard Tax Managed Balance Fund (VTMFX) and think of it as my "mortgage fund". Is that something you might be comfortable with?
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Lou354
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Re: 6.5% Mortgage / Pay Off

Post by Lou354 »

Paying down the mortgage while keeping an emergency fund would not be a bad idea for OP. It may be that the mortgage is part of what’s making OP so risk averse.

I was once like OP, with a mortgage and too much money in a savings account. Having a mortgage made me too anxious to invest because I worried about foreclosure if stocks went down and I lost my job at the same time. I quickly (4 or 5 years) paid down and then paid off the mortgage. Once I didn’t have a mortgage hanging over my head I found I was able to invest, and stay invested, in an appropriate mix of stocks and bonds, and it’s worked out very well.
Bud
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Re: 6.5% Mortgage / Pay Off

Post by Bud »

capran wrote: Wed Oct 30, 2024 4:17 pm After the house was paid off, it really did feel like money grew on trees!
This is my experience. My cost of living is extremely low without mortgage payments.

If you have mixed feelings and can not decide, take $100k and pay down your mortgage and then continue to pay of at your regular rate. If in a year, your heart/head/financial situation is telling you to finish paying it off, do it. In any case, At 39yrs old, you are in an excellent financial position and to be commended.

All the best!
RiskAnalyst
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Re: 6.5% Mortgage / Pay Off

Post by RiskAnalyst »

I hope OP finds this thread helpful, I worry that the range of contradictory answers will be disorienting.
invest4 wrote: Wed Oct 30, 2024 12:09 pm Welcome!

Your mortgage is not large relative to your income...and have technically already paid off half if the current home value is reasonably accurate.

I would wait and see what happens with interest rates and would suggest you be more interested in what you are doing with your portfolio and how to avoid bad behaviors like selling investments because you are uncomfortable.

I would strongly encourage you to post your portfolio utilizing the link below to get a better handle on where you are and where you are going as far as financial independence:

https://www.bogleheads.org/wiki/Asking_ ... _questions
I think the above is the most important consideration raised so far.
Not a professional risk analyst | Early accumulator
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