Investing cash at higher rate than mortgage

[JayRod]

I posted this in the Reddit forum but thought it may get more views/help here.

I owe 192k on a 3.125% fixed rate mortgage with 28 years left on it.

I have 192k in cash that I’ve considered paying off the mortgage with but with rates so high I’d rather put it in an investment earning a higher rate than the mortgage.

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s)

I’ve been looking at these option…Schwab’s money market fund SWVXX, SGOV ETF, 1 year Cd earning 4.85% and also considering laddering 3, 6, 9 and 12 month t bills with an average yield of 4.78.

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

Of the above options what would be best? I don’t need the monthly dividend so I’m leaning toward the 4.85% cd since it has the highest yield

[Mel Lindauer]

If it were me, I would continue to get the higher risk-free return until that dropped below the mortgage rate. Then I'd switch to paying off the mortgage. That's exactly what I did when I purchased a building.

[8301]

If you live in a state with state income tax, T-bills may be better because they are not subject to state or local taxes.

[exodusNH]

I posted this in the Reddit forum but thought it may get more views/help here.

I owe 192k on a 3.125% fixed rate mortgage with 28 years left on it.

I have 192k in cash that I’ve considered paying off the mortgage with but with rates so high I’d rather put it in an investment earning a higher rate than the mortgage.

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s)

I’ve been looking at these option…Schwab’s money market fund SWVXX, SGOV ETF, 1 year Cd earning 4.85% and also considering laddering 3, 6, 9 and 12 month t bills with an average yield of 4.78.

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

Of the above options what would be best? I don’t need the monthly dividend so I’m leaning toward the 4.85% cd since it has the highest yield

If you are subject to state tax, Treasuries would be better.

[JayRod]

I’m in a state with no state income tax, so the CD is higher. Go with the one year CD then?

[KlangFool]

OP,

1) Do you max up all your tax-advantaged accounts?

2) What is your marginal tax rate?

3) What is the size of your portfolio?

4) What is the size of your emergency fund?

5) For example, if you are 20+% marginal tax rate, why won't you contribute to your Trad 401K and save 20+% taxes? You do not have to invest in your Trad 401K. It can be in a money market fund. You still save 20+% taxes.

6) Do you contribute to your Roth IRA? You can withdraw your Roth IRA's contribution tax-free and penalty-free at any time.

7) Check out this URL.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

[JayRod]

If it were me, I would continue to get the higher risk-free return until that dropped below the mortgage rate. Then I'd switch to paying off the mortgage. That's exactly what I did when I purchased a building.

How far out would you lock in the higher rate?

[JayRod]

OP,

1) Do you max up all your tax-advantaged accounts?

2) What is your marginal tax rate?

3) What is the size of your portfolio?

4) What is the size of your emergency fund?

5) For example, if you are 20+% marginal tax rate, why won't you contribute to your Trad 401K and save 20+% taxes? You do not have to invest in your Trad 401K. It can be in a money market fund. You still save 20+% taxes.

6) Do you contribute to your Roth IRA? You can withdraw your Roth IRA's contribution tax-free and penalty-free at any time.

7) Check out this URL.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Yes, max out Roth IRAs.

12% marginal rate

IRAs are 260k.

House is worth 400k.

ER fund is 50k

[KlangFool]

OP,

1) Do you max up all your tax-advantaged accounts?

2) What is your marginal tax rate?

3) What is the size of your portfolio?

4) What is the size of your emergency fund?

5) For example, if you are 20+% marginal tax rate, why won't you contribute to your Trad 401K and save 20+% taxes? You do not have to invest in your Trad 401K. It can be in a money market fund. You still save 20+% taxes.

6) Do you contribute to your Roth IRA? You can withdraw your Roth IRA's contribution tax-free and penalty-free at any time.

7) Check out this URL.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Yes, max out Roth IRAs.

12% marginal rate

IRAs are 260k.

House is worth 400k.

ER fund is 50k

JayRod,

Do you qualify for saver's credit?

https://www.bogleheads.org/wiki/Saver%27s_credit

Or, EITC?

https://www.irs.gov/credits-deductions/ ... redit-eitc

KlangFool

[JayRod]

OP,

1) Do you max up all your tax-advantaged accounts?

2) What is your marginal tax rate?

3) What is the size of your portfolio?

4) What is the size of your emergency fund?

5) For example, if you are 20+% marginal tax rate, why won't you contribute to your Trad 401K and save 20+% taxes? You do not have to invest in your Trad 401K. It can be in a money market fund. You still save 20+% taxes.

6) Do you contribute to your Roth IRA? You can withdraw your Roth IRA's contribution tax-free and penalty-free at any time.

7) Check out this URL.

https://www.madfientist.com/how-to-acce ... nds-early/

KlangFool

Yes, max out Roth IRAs.

12% marginal rate

IRAs are 260k.

House is worth 400k.

ER fund is 50k

JayRod,

Do you qualify for saver's credit?

https://www.bogleheads.org/wiki/Saver%27s_credit

Or, EITC?

https://www.irs.gov/credits-deductions/ ... redit-eitc

KlangFool

No, don’t qualify for either.

If I wanted the monthly dividend, that eliminates the CD but puts the MMF and SGOV back on the table. Would a laddered 3,6,9,12 month tbill ladder be the best compromise?

[strummer6969]

I paid mine off. Keep in mind that you're paying taxes on the interest. I decided it wasn't worth the measly 1% difference.

[carminered2019]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

[JayRod]

I paid mine off. Keep in mind that you're paying taxes on the interest. I decided it wasn't worth the measly 1% difference.

After taxes the difference is still there but tight. I think rates are going higher though, or at least not down. If they go down I’ll pay it off

[JayRod]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

100% stocks and invest the cash flow into stocks. Yeah, that compounding might work better

[JayRod]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

But if I invest in something that pays a monthly dividend couldn’t I invest that into stocks? The monthly dividend is nearly the same as the monthly mortgage payment

[strummer6969]

I paid mine off. Keep in mind that you're paying taxes on the interest. I decided it wasn't worth the measly 1% difference.

After taxes the difference is still there but tight. I think rates are going higher though, or at least not down. If they go down I’ll pay it off

Yeah, that is a good point. You do lose that optionality if rates go even higher. I paid mine off when rates were much lower.

[carminered2019]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

100% stocks and invest the cash flow into stocks. Yeah, that compounding might work better

Plug the monthly mortgage amount in a compound interest calculator with 7%-8% return for 28 years and compare to the fixed income interest from 192K minus taxes. My personal experience with no mortgage the last 26 years, invested every single penny into 100% stock and now have portfolio of 72x.

[moneyflowin]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

Paying off the mortgage doesn't give him higher cash flow.

Which has higher cash flow:
A) Salary + $192k MMF - $192k mortgage
B) Salary

(A) wins

Don't pay off the mortgage. Invest the $192k into T-bills and MMF, and buy stocks with salary. If you encounter financial problems, you aren't any worse off... remember, you still have a $192k pile of cash.

[JayRod]

Pay off the mortgage and go 100% stock with new cashflow might be better in the long run than having a mortgage and putting cash in fixed income.

Paying off the mortgage doesn't give him higher cash flow.

Which has higher cash flow:
A) Salary + $192k MMF - $192k mortgage
B) Salary

(A) wins

Don't pay off the mortgage. Invest the $192k into T-bills and MMF, and buy stocks with salary. If you encounter financial problems, you aren't any worse off... remember, you still have a $192k pile of cash.

That’s my thinking. But do I put it all the mmf, tbill, cd, ladder it, short term tbill etf, combo of all?

[invest4]

Your fixed mortgage provides you with a number of benefits including:

* Inflation hedge

* Liquidity

* Leverage for further investment


For me, the decision to accelerate paying off the mortgage is not as simple as whether or not the mortgage rate is higher than than what you can get in a CD / other.

For example, during your accumulation phase, you may find that you do not have sufficient funds via your regular paycheck to max out all the tax advantaged accounts which may be available to you (401k, Roth, HSA, mega backdoor Roth, etc.). Your low rate mortgage can help enable you max these out in investments which may provide you with a better long term return.

Interest rates move up and down. Low rates in interest bearing accounts in one period of time, can easily (and sometimes swiftly) shift. Look no further than our current bout of inflation. Your mortgage, which is typically one's largest debt obligation insulated you from rising rates for that significant debt and has now enabled you to invest your cash at a higher rate. If you had been accelerating the payments on your low rate mortgage, you would have less monies available to you to take advantage.

Also, what is the real difference between the mortgage rate and risk free return in a CD / other? When is the difference sufficient to compel you to throw more money at your mortgage vs other alternatives? .5 percent? 1%...more? less?

My intention is not to suggest there are not situations where it is preferable to accelerate the payments on your mortgage...both financial as well as psychological. Rather, I am simply encouraging you to think about it a bit more, what goals you are trying to achieve and the options you have available to you to get there.

Best wishes.

[lakpr]

OP,

In a 12% tax bracket, your mortgage is actually costing you 3.125% ÷ (1 - 12%) = 3.55%.

The idea to invest that $192k into safe instruments like CDs and Treasuries is still the right choice, just saying that the number to focus on is 3.55% as your base yield you must expect and receive, not just 3.125%. If any CD is offering you less than that, you are better off paying down the mortgage.

[NiceUnparticularMan]

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s). . . . As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

I just want to note there is an implicit contradiction here.

You apparently don't want to invest the cash in something like longer-term Treasuries because you might want the cash for short-term purposes, which would make longer-term Treasuries risky because if you sold them before maturity they might have experienced a price drop. Fair enough.

But paying down/off a mortgage is like buying a ladder of Treasuries out to your 28 year term (with paying down starting at the end), and is even more illiquid in fact because you can't sell them at all. In that sense paying down/off the mortgage is even riskier for you than buying longer-term Treasuries.

So if you are not willing to consider longer-term Treasuries, why would you consider paying down/off the mortgage?

[mortfree]

Can’t you get a CD where the monthly interest goes to another account?

Personally I would not be thinking about paying off the mortgage.

You have about 310k between IRA and EF

500k if you include the 192k.

Your house is 400k with 210k equity

You payoff your house you only have 50k accessible and your net worth shifts to where you are 400k house and the 310k

How much is your monthly mortgage payment (P&I)?

How long will it take you to accumulate 190k again if you save the mortgage payment?

Hint: you won’t save the mortgage payment every month like you think.

Finally I would invest some of the money in VTI or stock fund of your choice.

[JayRod]

Your fixed mortgage provides you with a number of benefits including:

* Inflation hedge

* Liquidity

* Leverage for further investment


For me, the decision to accelerate paying off the mortgage is not as simple as whether or not the mortgage rate is higher than than what you can get in a CD / other.

For example, during your accumulation phase, you may find that you do not have sufficient funds via your regular paycheck to max out all the tax advantaged accounts which may be available to you (401k, Roth, HSA, mega backdoor Roth, etc.). Your low rate mortgage can help enable you max these out in investments which may provide you with a better long term return.

Interest rates move up and down. Low rates in interest bearing accounts in one period of time, can easily (and sometimes swiftly) shift. Look no further than our current bout of inflation. Your mortgage, which is typically one's largest debt obligation insulated you from rising rates for that significant debt and has now enabled you to invest your cash at a higher rate. If you had been accelerating the payments on your low rate mortgage, you would have less monies available to you to take advantage.

Also, what is the real difference between the mortgage rate and risk free return in a CD / other? When is the difference sufficient to compel you to throw more money at your mortgage vs other alternatives? .5 percent? 1%...more? less?

My intention is not to suggest there are not situations where it is preferable to accelerate the payments on your mortgage...both financial as well as psychological. Rather, I am simply encouraging you to think about it a bit more, what goals you are trying to achieve and the options you have available to you to get there.

Best wishes.

I was agree with all of that. My goal is to have more monthly free cash flow IF I need it. I could recast the mortgage instead of paying it off. But I need the money to actually be there. That’s why it needs to be low risk.

I still have positive cash flow but with a baby abs a wife who may never go back to work, it’s not as high as I was used to.

[JayRod]

OP,

In a 12% tax bracket, your mortgage is actually costing you 3.125% ÷ (1 - 12%) = 3.55%.

The idea to invest that $192k into safe instruments like CDs and Treasuries is still the right choice, just saying that the number to focus on is 3.55% as your base yield you must expect and receive, not just 3.125%. If any CD is offering you less than that, you are better off paying down the mortgage.

Yes, those were my numbers too, thanks

[JayRod]

Can’t you get a CD where the monthly interest goes to another account?

Personally I would not be thinking about paying off the mortgage.

You have about 310k between IRA and EF

500k if you include the 192k.

Your house is 400k with 110k equity

You payoff your house you only have 50k accessible and your net worth shifts to where you are 400k house and the 310k

How much is your monthly mortgage payment (P&I)?

How long will it take you to accumulate 190k again if you save the mortgage payment?

Hint: you won’t save the mortgage payment every month like you think.

Finally I would invest some of the money in VTI or stock fund of your choice.

Don’t I have 208 in home equity? 400-192?

P and I is 850.

Should have put this info in earlier but my situation is wife is not going back to work in the foreseeable future. She likes and prefers full time mom. This has obviously cut out monthly free cash flow. Still positive but not as much. Probably 500 dollars per month now.

So I want the ability to either pay off or recast mortgage substation lower monthly payment if cash flow gets too tight. That’s why the money needs to be ultra safe but also produce more return than the mortgage rate

[JayRod]

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s). . . . As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

I just want to note there is an implicit contradiction here.

You apparently don't want to invest the cash in something like longer-term Treasuries because you might want the cash for short-term purposes, which would make longer-term Treasuries risky because if you sold them before maturity they might have experienced a price drop. Fair enough.

But paying down/off a mortgage is like buying a ladder of Treasuries out to your 28 year term (with paying down starting at the end), and is even more illiquid in fact because you can't sell them at all. In that sense paying down/off the mortgage is even riskier for you than buying longer-term Treasuries.

So if you are not willing to consider longer-term Treasuries, why would you consider paying down/off the mortgage?

Should have said this earlier for context…
situation is wife is not going back to work in the foreseeable future. She likes and prefers full time mom. This has obviously cut out monthly free cash flow. Still positive but not as much. Probably 500 dollars per month now.

So I want the ability to either pay off or recast mortgage substation lower monthly payment if cash flow gets too tight. That’s why the money needs to be ultra safe but also produce more return than the mortgage rate.

Only reason I wouldn’t do long term treasury is that rates go a lot higher and I need to sell my house long before bond matures it will be down substantially right when I need it to buy next house. Duration risk

[kd2008]

Typically mortgage payoff questions answer themselves...did the OP bring up cash flow, retirement etc or did they bring up interest rates, leverage, inflation hedge etc. It is hard for people to realize their anchoring biases.

Based on your concern around cash flow, I would say just go ahead and pay it off. If you are still on the fence with it, then just put it Vanguard treasury money market fund. You will get 4%+ rate, you will have liquidity to withdraw anytime and if the rates go up you will capture that. Do not overthink this. There is nothing to be gained by paralyzing your decision making by thinking about t-bills, CDs etc.

Another bias that may be in play is end of history illusion. You seemed anchoring on today's cash flow and you seem to believe that it will continue into the future without change. Most likely your income may go up faster than your cash flow needs resolving the conundrum you are fixated on now. In hindsight, you may prefer to have invested in stocks in taxable account - at least a portion of 192K.

[JayRod]

Typically mortgage payoff questions answer themselves...did the OP bring up cash flow, retirement etc or did they bring up interest rates, leverage, inflation hedge etc. It is hard for people to realize their anchoring biases.

Based on your concern around cash flow, I would say just go ahead and pay it off. If you are still on the fence with it, then just put it Vanguard treasury money market fund. You will get 4%+ rate, you will have liquidity to withdraw anytime and if the rates go up you will capture that. Do not overthink this. There is nothing to be gained by paralyzing your decision making by thinking about t-bills, CDs etc.

Another bias that may be in play is end of history illusion. You seemed anchoring on today's cash flow and you seem to believe that it will continue into the future without change. Most likely your income may go up faster than your cash flow needs resolving the conundrum you are fixated on now. In hindsight, you may prefer to have invested in stocks in taxable account - at least a portion of 192K.

Good advice. I can get so perfectionistic that a drive myself crazy.

If I knew my cash flow would be like this forever I’d pay it off. But you’re right, it will probably go up. Wife will probably work again. Will probably get a very large inheritance within 15 years, well before mortgage is done.

I’m not used to cash flow being this tight and this past year’s inflation made it seem worse. Also, I’ve been on permanent disability for 12 years, which makes me more conservative.

I’ll pick a tbil/mmf situation and see what happens.

Also I’ve been very influenced by Morgan Housel’s psychology of money book where he talks about having no mortgage. He knows it’s irrational for him but he likes it, so it’s reasonable to him

[JayRod]

By using a mmf or equivalent I don’t lose the option to pay it off or pay it down if I need to. Paying it down or off is a last resort.

If cash flow situation improves for me, I can invest the 192k into stocks.

It previously was mostly in stocks. The recent rally is what led me to sell and do this now. I was seeing how much tighter things were in June but was not going to sell into such a bear market.

[galawdawg]

How long do you intend to stay in the house? It makes little sense to pay it off (or even pay it down) if you'll be selling in a few years. All you'd be doing is moving liquid assets to a non-liquid asset and then back to a liquid asset and the spread you'd forgo between your mortgage rate and rate on your cash wouldn't be worth it.

Have you calculated the actual spread between your mortgage rate and the rate you would earn on your cash, invested in a vehicle that meets your requirements for safety and liquidity? In doing so, you need to account for tax liability on your invested cash returns and deductibility of your mortgage interest, if you currently itemize. If you have run those numbers, what is the actual spread? If not, you need to do those calculations in order to make a wise decision IMO.

[JayRod]

How long do you intend to stay in the house? It makes little sense to pay it off (or even pay it down) if you'll be selling in a few years. All you'd be doing is moving liquid assets to a non-liquid asset and then back to a liquid asset and the spread you'd forgo between your mortgage rate and rate on your cash wouldn't be worth it.

Have you calculated the actual spread between your mortgage rate and the rate you would earn on your cash, invested in a vehicle that meets your requirements for safety and liquidity? In doing so, you need to account for tax liability on your invested cash returns and deductibility of your mortgage interest, if you currently itemize. If you have run those numbers, what is the actual spread? If not, you need to do those calculations in order to make a wise decision IMO.

After all the calculations the spread is 0.775%

[cbox]

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

This makes sense, although speaking personally, the feeling of being mortgage free is FANTASTIC! I've been mortgage free for, oh, must be 13 years now, and I have never once regretted paying off my mortgage.

Every time this subject comes up, you'll see all kinds of people repeating the same themes: mortgage is "good debt," opportunity cost, cash strapped, can earn more in x, y, or z. To most of that, I say "hogwash!"

[JayRod]

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

This makes sense, although speaking personally, the feeling of being mortgage free is FANTASTIC! I've been mortgage free for, oh, must be 13 years now, and I have never once regretted paying off my mortgage.

Every time this subject comes up, you'll see all kinds of people repeating the same themes: mortgage is "good debt," opportunity cost, cash strapped, can earn more in x, y, or z. To most of that, I say "hogwash!"

Yes, I see the appeal.

To me, putting 192k in and getting a 4.67% return on a 3 month tbill is the equivalent of paying off the mortgage because it gives me almost all if principal and interest payment. But I still have the liquidity. If wife goes back to work I can use that to invest because it won’t be locked into a house with only a 3.125% return

If I don’t need the extra 750 per month and savings are building up, I’ll invest the extra buildup cash

[galawdawg]

How long do you intend to stay in the house? It makes little sense to pay it off (or even pay it down) if you'll be selling in a few years. All you'd be doing is moving liquid assets to a non-liquid asset and then back to a liquid asset and the spread you'd forgo between your mortgage rate and rate on your cash wouldn't be worth it.

Have you calculated the actual spread between your mortgage rate and the rate you would earn on your cash, invested in a vehicle that meets your requirements for safety and liquidity? In doing so, you need to account for tax liability on your invested cash returns and deductibility of your mortgage interest, if you currently itemize. If you have run those numbers, what is the actual spread? If not, you need to do those calculations in order to make a wise decision IMO.

After all the calculations the spread is 0.775%

So keeping the $192k as invested cash in fixed income will net you about $125/mo.

You mention that your wife is likely to become a stay-at-home mom and you expect your monthly surplus cash at that point to be about $500/mo. Does that only take into account the loss of her income or have you also adjusted for a possible lower tax rate, reduction in costs of work (commuting, lunch out, dry cleaning, etc)?

Have you started investing for college for your child if that is something you intend to do? If not, I'd recommend that in reviewing your investment objectives surrounding the $192k in cash that you also take that into consideration. If this was a simple, neat and clean "I'm in my fifties, kids are grown and gone, plenty saved for retirement, should I pay off my mortgage" question, the answer wouldn't be too difficult. However, it may be helpful in this situation to take a 50,000 foot view of your total financial and investment picture, including your goals and objectives, before making any decisions on that cash.

[GMCZ71]

Welcome to Bogleheads

Just some things to consider:
learn to do your own taxes
get your asset allocation (AA) right for you and wife
be tax efficient, https://www.bogleheads.org/wiki/Tax-eff ... _placement
your AA is for all accounts as one not to mirror in each account

So as an example your $192k in taxable could be mostly stock and tax deferred could be changed to cd, bond treasuries etc. to keep AA the same. You are still beating the mortgage rate just not in taxable. Your income is not higher and taxes are not higher.

Lets say the market is down but its time to fund both Roths. You fund anyway and get more shares at a lower price in Roth and use the loss in taxable to lower taxes. Or market is higher and you sell with a gain to fund Roth if your income is low enough no tax on long term gain (1yr holding)

You do you, we are just giving advise on what might work better.

[Outer Marker]

That’s my thinking. But do I put it all the mmf, tbill, cd, ladder it, short term tbill etf, combo of all?

It's a sound plan based on simple math and an easy arbitrage opporutnity. I'm doing the same thing. Don't over-complicate it. Just park the cash in a money market fund, and if the trade-off between the mortgage rate and money market rate flips, pay it off.

[JayRod]

How long do you intend to stay in the house? It makes little sense to pay it off (or even pay it down) if you'll be selling in a few years. All you'd be doing is moving liquid assets to a non-liquid asset and then back to a liquid asset and the spread you'd forgo between your mortgage rate and rate on your cash wouldn't be worth it.

Have you calculated the actual spread between your mortgage rate and the rate you would earn on your cash, invested in a vehicle that meets your requirements for safety and liquidity? In doing so, you need to account for tax liability on your invested cash returns and deductibility of your mortgage interest, if you currently itemize. If you have run those numbers, what is the actual spread? If not, you need to do those calculations in order to make a wise decision IMO.

After all the calculations the spread is 0.775%

So keeping the $192k as invested cash in fixed income will net you about $125/mo.

You mention that your wife is likely to become a stay-at-home mom and you expect your monthly surplus cash at that point to be about $500/mo. Does that only take into account the loss of her income or have you also adjusted for a possible lower tax rate, reduction in costs of work (commuting, lunch out, dry cleaning, etc)?

Have you started investing for college for your child if that is something you intend to do? If not, I'd recommend that in reviewing your investment objectives surrounding the $192k in cash that you also take that into consideration. If this was a simple, neat and clean "I'm in my fifties, kids are grown and gone, plenty saved for retirement, should I pay off my mortgage" question, the answer wouldn't be too difficult. However, it may be helpful in this situation to take a 50,000 foot view of your total financial and investment picture, including your goals and objectives, before making any decisions on that cash.

Yes, the 500 is after all savings from tax rate, etc.

Have not set a specific college fund situation up. First priority is to get the monthly cash flow more comfortable without having to pinch every penny so tight. We’re in like a Dave Ramsey style to get to that 500. If we slacked we could be easily breaking even. Seems silly to have over 700k in assets and live so tight. Causes stress in marriage and all around

[JayRod]

Welcome to Bogleheads

Just some things to consider:
learn to do your own taxes
get your asset allocation (AA) right for you and wife
be tax efficient, https://www.bogleheads.org/wiki/Tax-eff ... _placement
your AA is for all accounts as one not to mirror in each account

So as an example your $192k in taxable could be mostly stock and tax deferred could be changed to cd, bond treasuries etc. to keep AA the same. You are still beating the mortgage rate just not in taxable. Your income is not higher and taxes are not higher.

Lets say the market is down but its time to fund both Roths. You fund anyway and get more shares at a lower price in Roth and use the loss in taxable to lower taxes. Or market is higher and you sell with a gain to fund Roth if your income is low enough no tax on long term gain (1yr holding)

You do you, we are just giving advise on what might work better.

Yes, I use turbo tax.

I’ve always followed Buffett’s 90/10 allocation. I still prefer that but need this monthly cash flow to get more positive. 500 dollars per month while living incredibly frugal leaves no room for error. My next car tune up will take a whole month of savings. Life throws too many surprises for only 500 per month breathing room.

[bberris]

I posted this in the Reddit forum but thought it may get more views/help here.

I owe 192k on a 3.125% fixed rate mortgage with 28 years left on it.

I have 192k in cash that I’ve considered paying off the mortgage with but with rates so high I’d rather put it in an investment earning a higher rate than the mortgage.

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s)

I’ve been looking at these option…Schwab’s money market fund SWVXX, SGOV ETF, 1 year Cd earning 4.85% and also considering laddering 3, 6, 9 and 12 month t bills with an average yield of 4.78.

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

Of the above options what would be best? I don’t need the monthly dividend so I’m leaning toward the 4.85% cd since it has the highest yield

You pay taxes on the income, while you won't deduct all, or possibly any, of the interest expense of the mortgage because of the standard deduction. Paying off the mortgage gives you 3.125 % tax free, risk free.

[JayRod]

I posted this in the Reddit forum but thought it may get more views/help here.

I owe 192k on a 3.125% fixed rate mortgage with 28 years left on it.

I have 192k in cash that I’ve considered paying off the mortgage with but with rates so high I’d rather put it in an investment earning a higher rate than the mortgage.

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s)

I’ve been looking at these option…Schwab’s money market fund SWVXX, SGOV ETF, 1 year Cd earning 4.85% and also considering laddering 3, 6, 9 and 12 month t bills with an average yield of 4.78.

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

Of the above options what would be best? I don’t need the monthly dividend so I’m leaning toward the 4.85% cd since it has the highest yield

You pay taxes on the income, while you won't deduct all, or possibly any, of the interest expense of the mortgage because of the standard deduction. Paying off the mortgage gives you 3.125 % tax free, risk free.

But IF rates stay here I can get more than 3.125, even after taxes.

[JayRod]

I really appreciate all the responses. Seems to be no one “right” answer. Lots of personal preference and individual psychology. You guys are great.

[GMCZ71]

I really appreciate all the responses. Seems to be no one “right” answer. Lots of personal preference and individual psychology. You guys are great.

Yes many answers, keep reading the forum. Is the wife good with a 90/10?

[StewedCarrot]

OP,

Imagine fixed income returns went up a by point or two. Say 6%. If you had paid down the mortgage, you’d have left money on the table. How would you feel then?

Also, paying down a mortgage does not mean zero housing costs. In fact, many of those costs are lumpy and require liquidity.

This is really a no-brainer. You can use your liquid assets to earn more than the mortgage costs after all tax considerations. Put it in a MMF until rates drop or you are comfortable investing.

[abuss368]

I posted this in the Reddit forum but thought it may get more views/help here.

I owe 192k on a 3.125% fixed rate mortgage with 28 years left on it.

I have 192k in cash that I’ve considered paying off the mortgage with but with rates so high I’d rather put it in an investment earning a higher rate than the mortgage.

My monthly free cash flow is rather tight so I’m not going to invest in anything with risk. (I have risk in my IRA’s)

I’ve been looking at these option…Schwab’s money market fund SWVXX, SGOV ETF, 1 year Cd earning 4.85% and also considering laddering 3, 6, 9 and 12 month t bills with an average yield of 4.78.

As long at rates stay higher than the mortgage I won’t pay it off. If they drop below, I will.

Of the above options what would be best? I don’t need the monthly dividend so I’m leaning toward the 4.85% cd since it has the highest yield

I have seen strategies, where (assuming there is no other high interest rate debt) the minimum payment is paid for the mortgage, with any excess accumulated (not spent or invested) in cash. This considers a low mortgage rate and a respectable savings account rate.

Once the opposite occurs in terms of rates, the mortgage can be paid down or excess applied to the payments.

There are other points to consider such as longer term planning, overall debt, how much equity is available in the property, etc.

Best.
Tony

[mortfree]

Can’t you get a CD where the monthly interest goes to another account?

Personally I would not be thinking about paying off the mortgage.

You have about 310k between IRA and EF

500k if you include the 192k.

Your house is 400k with 110k equity

You payoff your house you only have 50k accessible and your net worth shifts to where you are 400k house and the 310k

How much is your monthly mortgage payment (P&I)?

How long will it take you to accumulate 190k again if you save the mortgage payment?

Hint: you won’t save the mortgage payment every month like you think.

Finally I would invest some of the money in VTI or stock fund of your choice.

Don’t I have 208 in home equity? 400-192?

P and I is 850.

Should have put this info in earlier but my situation is wife is not going back to work in the foreseeable future. She likes and prefers full time mom. This has obviously cut out monthly free cash flow. Still positive but not as much. Probably 500 dollars per month now.

So I want the ability to either pay off or recast mortgage substation lower monthly payment if cash flow gets too tight. That’s why the money needs to be ultra safe but also produce more return than the mortgage rate

Who cares about cash flow when you have 192k cash and a 50k EF.

At $850 for PI it will take you 18-19 years to save 192k again. If you keep that money you are basically guaranteed to have $850 per month available for the next 18 years.

Of course life throws curveballs - home ownership is expensive, kids are expensive, vehicles, college costs. Loans are available for those items but will the rate be more or less than your mortgage.

I think you are focused on the wrong financial matter. You need to ignore the mortgage and trying to beat that rate with the money. The money will grow and be accessible if you don’t payoff the mortgage.

I had a paid off mortgage for about 2 years. We moved and now I have a mortgage again. It’s down to 160k, 3.125 for a 20 year taken out summer 2020. I could pay it off but I won’t. I like having 300k in taxable funds available.

And yes I did miscalculate the equity - knew something didn’t feel right.

[vxdx]

Why such a focus on cash flow when you have 192k in cash?

If you’re saying you spend more than you get every month, that’s a spending issue. You can always withdraw whatever you want from the 192k to create the cash flow you need.

It doesn’t make sense to pay off the house. I’d personally put some in the market, say what you don’t need for the next 10 years, and put the rest in a money market fund.

[jeremyl]

Not sure if anyone mentioned this as I didn't read all of the replies but what if you split the funds?

Take half off your $192k and recast the mortgage at the same rate and invest the other half?

That could free up your cash flow and get you invested like others have mentioned.

Just a thought. Others here mention this strategy at times.

[Raycpact]

I am considering using a MYGA paying 5% that allows 10% withdrawals instead of paying a 2% mortgage. Love to hear pros and cons.

[AnEngineer]

You mention recasting the mortgage. Can you do this without increasing your interest rate?

You seem focused on cash flow, but with liquid investments you can always sell to get cash, even for investments with some risk like longer term bonds.

I'd hate to put any extra money towards mortgage when there's an interest rate arbitrage opportunity as treasury yields of all durations are above your mortgage rate, even factoring taxes in. And if they dipped a little, keep EE bonds in mind (guaranteed to double at 20 years.)