Pay down your Mortgage

[fiverus]

What does TIRA's mean?

[sport]

What does TIRA's mean?

Traditional IRA. There is also a Roth IRA.

[sport]

Yes, CD is tax free income. I called Ally to double check this.

CD interest is taxable for Federal Income Tax and State Income Tax if your state has such a tax. The only time it is tax free is when your income is too low to pay taxes. Ally cannot determine this for you.

[vp89]

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amount used to pay down the mortgage has been replaced and then some by gain during the last 1.5 years when we haven't withdrawn anything from TIRA's.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.

Someone please correct me if Im wrong, but assuming a 5% state tax rate (and 12% federal OP stated) then the after-tax "return" on paying down the 3.75% mortgage would be 4.39% for the remaining duration of the loan.

A hypothetical 5% investment with an equal risk profile (money market, CD, treasury/muni bonds) would have an after-tax return of 4.15% or 4.40% if the investment is not taxable at the state level.

So in this case, the rates are roughly equal therefore the added liquidity from NOT paying down the mortgage wins. But in lots of other cases, where the tax rate and/or mortgage rates are higher then I don't think "the math" is as much of a no brainer as it first seems.

[Outer Marker]

But in lots of other cases, where the tax rate and/or mortgage rates are higher then I don't think "the math" is as much of a no brainer as it first seems.

Figuring the after-tax return of the respective mortgage and CD rates is doing the math. There will absolutely be cases where paying off the mortgage is better. This is not one of them.

[MichRoots]

Why pay it down?

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

I paid off my 3.375% mortgage a couple years ago. Now the entire amount I used to spend on my mortgage can make 5.3% instead of 1.925%. If I wanted to go that route.

[faanger101]

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 got 2.5 mortgage, and 3.2 + 3.7 auto loans. Make minimal payments, even the official inflation is higher.

[Pax]

But in lots of other cases, where the tax rate and/or mortgage rates are higher then I don't think "the math" is as much of a no brainer as it first seems.

Figuring the after-tax return of the respective mortgage and CD rates is doing the math. There will absolutely be cases where paying off the mortgage is better. This is not one of them.

Could someone direct me to a place where I can learn to do this math? Perhaps a calculator, somewhere? Thanks!

[alex_686]

But in lots of other cases, where the tax rate and/or mortgage rates are higher then I don't think "the math" is as much of a no brainer as it first seems.

Figuring the after-tax return of the respective mortgage and CD rates is doing the math. There will absolutely be cases where paying off the mortgage is better. This is not one of them.

Could someone direct me to a place where I can learn to do this math? Perhaps a calculator, somewhere? Thanks!

After Tax Yield = Yield * (1-marginal tax rate)

Where marginal tax rate is either your marginal tax rate of on your income tax or the tax savings from your mortgage.

[hudson]

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?

That works for me. Being debt free is good.
I would check the rules for your mortgage and check the balance to see if it was working as planned.

[Outer Marker]

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?

That works for me. Being debt free is good.
I would check the rules for your mortgage and check the balance to see if it was working as planned.

I’d just include the additional payment as part of your regular monthly payment. Unless you have a non-standard mortgage, that will automatically be applied to principal reduction. Sending two separate checks increases the chance your payment might be applied to the next regular payment. Checks are machine processed. Nobody reads the re line.