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Here’s a question for all you financial gurus. I am trying to decide whether it makes sense to pay off my mortgage at the beginning of 2019. Here are the facts:
The property is my residence. The remaining principal is about $100K. It is a 15 year mortgage at 3%. If I let the mortgage amortize to the end of the 15 years (2027), I will pay about $20K in interest over that time.
I plan to sell within about 2 years and downsize to a smaller property. If I sell at the end of 2020, I will have paid about $7500 in interest up to that time.
The money I would use to pay down the mortgage is currently in a savings account at the credit union earning about 1%.
I also have a ladder of CDs that I could use to put a down payment on a replacement property and the feds have started making me take RMDs from my 401(k) so I won’t be cash poor.
Until now, I’ve had enough deductions to itemize and the mortgage interest has been a big part of it. But with the rewritten tax law it is going to make more sense to take the standard deduction unless I have huge unanticipated medical bills, so I lose any tax advantage to keeping the mortgage.
The way I am looking at this is that even though the 3% interest I’m paying is a screaming good deal, I’m only earning 1% on the savings account, so might as well put that money where it will do me more good. I will also save at least $7500 in interest payments, assuming I sell by the end of 2020. The downside is that I will be less liquid by $100K. It seems that paying the mortgage off is marginally better financially and has a nice psychological kick to it as well.
Here’s a question for all you financial gurus. I am trying to decide whether it makes sense to pay off my mortgage at the beginning of 2019. Here are the facts:
The property is my residence. The remaining principal is about $100K. It is a 15 year mortgage at 3%. If I let the mortgage amortize to the end of the 15 years (2027), I will pay about $20K in interest over that time.
I plan to sell within about 2 years and downsize to a smaller property. If I sell at the end of 2020, I will have paid about $7500 in interest up to that time.
The money I would use to pay down the mortgage is currently in a savings account at the credit union earning about 1%.
I also have a ladder of CDs that I could use to put a down payment on a replacement property and the feds have started making me take RMDs from my 401(k) so I won’t be cash poor.
Until now, I’ve had enough deductions to itemize and the mortgage interest has been a big part of it. But with the rewritten tax law it is going to make more sense to take the standard deduction unless I have huge unanticipated medical bills, so I lose any tax advantage to keeping the mortgage.
The way I am looking at this is that even though the 3% interest I’m paying is a screaming good deal, I’m only earning 1% on the savings account, so might as well put that money where it will do me more good. I will also save at least $7500 in interest payments, assuming I sell by the end of 2020. The downside is that I will be less liquid by $100K. It seems that paying the mortgage off is marginally better financially and has a nice psychological kick to it as well.
Have I missed anything?
Thanks!
Yes, if you tie all your funds up in the property then you will have to sell your first house before buying the second, which means paying moving expenses twice.
Here’s a question for all you financial gurus. I am trying to decide whether it makes sense to pay off my mortgage at the beginning of 2019. Here are the facts:
The property is my residence. The remaining principal is about $100K. It is a 15 year mortgage at 3%. If I let the mortgage amortize to the end of the 15 years (2027), I will pay about $20K in interest over that time.
I plan to sell within about 2 years and downsize to a smaller property. If I sell at the end of 2020, I will have paid about $7500 in interest up to that time.
The money I would use to pay down the mortgage is currently in a savings account at the credit union earning about 1%.
I also have a ladder of CDs that I could use to put a down payment on a replacement property and the feds have started making me take RMDs from my 401(k) so I won’t be cash poor.
Until now, I’ve had enough deductions to itemize and the mortgage interest has been a big part of it. But with the rewritten tax law it is going to make more sense to take the standard deduction unless I have huge unanticipated medical bills, so I lose any tax advantage to keeping the mortgage.
The way I am looking at this is that even though the 3% interest I’m paying is a screaming good deal, I’m only earning 1% on the savings account, so might as well put that money where it will do me more good. I will also save at least $7500 in interest payments, assuming I sell by the end of 2020. The downside is that I will be less liquid by $100K. It seems that paying the mortgage off is marginally better financially and has a nice psychological kick to it as well.
Have I missed anything?
Thanks!
Pay it off. Unless --- by doing so you don't have enough of an emergency fund.
The OP taking RMDs so they're at least 70 1/2. They're going to sell in 2 years so, unless they're way higher income than I'm guessing, it hardly matters if they pay it off or not since it's a 3% note. Married and taking the standard deduction, you're still in the 12% bracket at $100K AGI. With 2018 tax law, the OP probably can't itemize. Moving the cash somewhere, the OP might get close to 3%. Income taxes on $3K of interest income in the 12% bracket will be chump change so there's no point worrying about tax avoidance.
Personally, I'd just move the cash parked in a brick & mortar bank to something that pays better. Ally Bank pays 2% for vanilla savings. They pay 2.30% for an 11 month CD product with no penalty for cashing it in. They pay 2.75% for a 1 year CD. Pick some combination of those or go chase higher intro rates elsewhere.
The OP taking RMDs so they're at least 70 1/2. They're going to sell in 2 years so, unless they're way higher income than I'm guessing, it hardly matters if they pay it off or not since it's a 3% note. Married and taking the standard deduction, you're still in the 12% bracket at $100K AGI. With 2018 tax law, the OP probably can't itemize. Moving the cash somewhere, the OP might get close to 3%. Income taxes on $3K of interest income in the 12% bracket will be chump change so there's no point worrying about tax avoidance.
Personally, I'd just move the cash parked in a brick & mortar bank to something that pays better. Ally Bank pays 2% for vanilla savings. They pay 2.30% for an 11 month CD product with no penalty for cashing it in. They pay 2.75% for a 1 year CD. Pick some combination of those or go chase higher intro rates elsewhere.
Thanks everybody & especially Geoff for helping me gain perspective on this. Geoff, you're right: no matter what I do, the amounts of any gains/losses will be pretty minimal. Instead of focusing on the shiny allure of a paid off mortgage, I should be maximizing the return on my cash rather than letting it languish in a low-interest account. I'm investigating CDs and bond funds this weekend.
No. Don’t pay it off. The interest is deductible. At your rate it’s pointless to pay it off early.
My most current mortgage is 3.25 and I’m not paying it off early
Move the money in a better % rate account
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, I should be maximizing the return on my cash rather than letting it languish in a low-interest account. I'm investigating CDs and bond funds this weekend.
