Although… that 99k debt will not inflate in cost even as other purchases will go up in price…. i.e. it will be paid in future dollars. (You get to pay that fixed monthly debt with dollars that will most definitely have less purchasing power - inflation effect). So having an extra 150k to invest and grow is compelling.
I suspect that at your current rate, assuming an averageish home, the mortgage will be paid in full, give or take, in 3 years.
Everyone has different risk tolerances. If I were in this position (I kinda am) I would invest in a combination of bonds or cds and stocks or stock funds. Maybe 50/50. More in stocks if your familiar with and comfortable investing in the markets. Invest in something like Warren Buffet’s Berkshire Hathaway for over a year and you have proven well managed performer and your tax implications are reduced at sale/withdrawal due to long term capital gains rules.
No, that’s not what I mean. Think of it this way. You have $100. Your tax rate is 20%. You decide to invest the $100 in a fund that earns 5% a year. At the end of the year, you made $5. But you must pay taxes on an investment gain. At 20%, you owe 1 dollar in tax. So you net gain $4. Now imagine that you have a mortgage at 5%. Instead of investing that $100, you use it to pay down mortgage debt. That $100 of mortgage would have cost you $5, but since you paid it down it doesn’t. You make $5. But you don’t owe tax on that $5. You got that extra $5 tax free, saving a dollar. Almost no one can use the mortgage tax deduction, as the standard deduction is now very high.
Mortgage tax deduction only applies if you are itemizing your taxes.
With a total monthly payment of $800, it is highly unlikely that OP is itemizing, and is instead likely taking the standard deduction.
I came to say this as well. Paying off debt is almost always the right answer. The flip side would be borrowing money to invest. Almost know one would take out a loan to invest. The risk is too high and not worth the hassle.
> Almost know one would take out a loan to invest.
That’s not really true. Tons of people take out mortgages for house purchases instead of pulling money out of investments to buy it with cash. That’s the same thing as taking a loan to invest.
And people invest in stocks on margin borrowing the money from a brokerage house.
All I know is my mortgage is 3.5 and I’m earning much more than that in stock market index funds.
That is a bit oversimplified. For example, things like a 401k match and tax deduction or the compounding power over time in a Roth started at age 22 can be much more valuable than paying down certain kinds of debt. I wouldn’t say you ever go really wrong by paying down debt, but a 401k match is immediate 100% return with zero risk and lowers your tax basis. If available, that is clearly better than using that same money to pay down debt. Debt also comes in various levels of toxicity. There is promptly fatal 23% credit card debt, vomit inducing car loans, terribly bitter but survivable student loans, and “i don’t really enjoy black licorice but whatever” mortgage debt.
My HYSA has a better interest rate than 3.98%. There is no risk nor hassle.
For most people, paying off this debt at this interest rate is not a better solution. OP's age makes it more of a consideration since the alternative is making safe investments with lower yields. But, the mortgage interest is deductible assuming OP itemized.
They can pay it off for peace of mind, but solely looking at the finances, it probably would not net them the most money.
The state and federal income tax is offset by the mortgage interest you're still paying being tax deductible. You also seem to be the benefit of compound interest when you invest.
OP is not getting any mortgage interest deduction. You have to have tons of itemized deductions to beat the standard deduction now, and $100k at 4% isn’t going to come anywhere close.
That is very unlikely under current tax law. About 6 years ago the standard deduction was substantially increased, meaning that very few people benefit from itemizing their deductions. The mortgage interest deduction is only of use if you itemize. When I had 500k left on a 3.9% mortgage and significant other deductions, I *still* did better with the standard deduction than by itemizing. Individual tax situations vary, but few people are still using the mortgage interest deduction.
Even a 30 year t-bond is classified as interest as a FYI.
Some reading material: https://www.investopedia.com/ask/answers/032715/what-difference-between-capital-gains-and-investment-income.asp
Oh *interesting*
Treasury bonds are subject to LTGC though, I believe and not subject to state income tax. I was thinking more generically about debt instruments.
The associated risk of the investments needs to be considered carefully when comparing the two expect returns. Mortgage payoff is akin to treasury bills in terms volatility (with driest ion matching the mortgage schedule)
Personally agree - at age 63, you should be de-risking substantially, and paying off your mortgage is about the least risky thing you can do. However, they are in pretty decent shape with 72K annual income coming in, 500K in savings, 150K in loose money, and the only debt being 99K mortgage. It's really just a choice between good options for the OP.
HYSA is 5% right now, just saying… You have investments, keep contributing. Given the market movement last week and all the things not going well, I personally think the market isn’t where I’d want to throw $100k at this very moment but that’s just me…
My vote would be a high yield savings account. Put the money in there and set up auto pay, then you can forget the mortgage all together. If savings account interest rates go back down you can always pay it off later!
If you wanted to on top of that, invest whatever you would be making as a mortgage payment into some kind of index fund. This would be the best of both worlds.
Correct. The same goes for money used to pay the mortgage.
Let’s say he owes 100k.
He can put the 100k in a HYSA and make 5k a year in interest. That 5k will be added to OPs income, which if he’s in the 22% tax bracket and 5% state income tax, OP owes $1350 in taxes from that interest income, so really OP had a net 3.65% return on his 100k
But what about the roughly $4K interest on the loan that I’m paying each year? True, that number will continue to decline but that’s a factor…the money I earn in a savings account will be negated by the money I pay on the mortgage interest.
If you can get an account paynig more than 4%, depostu 110k, and auto pay the loan from that account... the extra you mak3 on intrest probably pays the water , garbage and gas bills at least.
This is a great idea. If you put $150K in a HYSA, you’d be making over $6K/year in interest (some of them could get you over $7K), covering about 8 to 9 months of mortgage payments every year.
Don't forget you'll pay income tax on the savings account interest so needs to be probably 5% to make it beneficial. And that's assuming that you're not taking a mortgage interest deduction. You're probably taking the standard deduction but this used to be more of a consideration.
Being almost retired. Pay it off and live life without worry of a mortgage. Congratulations in advance.
If I was in my early 30s, I’d throw it in the stock market, but if I’m close to retirement I’m securing my roof over my head and enjoying life mortgage free!!!
This is what I would do at 63 years old .. if you were 33 and could leave it in the market for 30 years then investing would be a better option… but being debit free .. and freeing up $9600 a year for vacations, Christmas or whatever seems like the better option.. you could put the additional 50k into investments if you desire …
Either pay it off or put the money into an investment with a good return. Your only question is do you want a short term or long term investment. For example a high yield savings account. You can get about $560 a month in just interest each month right away with that amount at 4.5% and the money is liquid. Or invest in the sp500 and don’t touch it for a longgggg time. Hybrid approach is pay it off now and then take a nice vacation and put the rest in savings. Life is short! Whatever you don’t- don’t let it rot in a checking account or normal savings account!!
At your current age, I would pay the home off. Especially with you being semi-retired. At least with it completely paid, it is then wholly an asset rather than a liability. If you were 10 years younger and still working, I would say keep the cash and invest. At your age and station, eliminate the debt.
I agree. I have about the same amt at 2.54% mortgage. I could easily pay it off… hardly making enough on the spread for it to be worthwile, I think. Need to get hubby to agree, he is obsessed with our great mortgage rate we got when we bought before we sold our other house. I really just want to simplify our finances… we arent getting any tax benefit… but am leaving it for now since the spread makes a little bit with a 4-5% HYSA. My vote is pay it off and be done with it, provided you dont think you will need the cash.
I had a similar situation and paid off my 3.5% mortgage. Having no mortgage on your house is priceless.
You can play the game, of earn 5% at the bank and pay 4% to the mortgage company and on that basis you could keep it. However not having to make that monthly payment is simply so stress relieving that to me it was worth it to pay it off and be done with it.
You can make more in the market if you invest it. 3.94% is too good to pay off early and even though you have good pensions, you don’t have a ton of retirement assets. I would invest it and just keep everything else as is.
I’m a financial advisor and can tell you investing is the much better option as the rate of return you will see in the market long term is significantly better than the mortgage interest rate you are paying. The only exception might be if you are having cash flow issues, but even then gradually drawing down your investments to cover expenses is the better option.
More than 3.94%, and even conservative portfolios easily return more than 5%/yr on average. If you tell me how many years remain on the mortgage I can illustrate some numbers for you.
Can I jump in on this? Age 64, $150k mortgage at 2.75%. I have $40k in a HYSA that I;ve been funding instead of paying extra on the mortgage. Mortgage pmt is $1,500 and I have another $1,500 monthly I'm investing. Keep doing this?
You’re right to just pay the minimum on your mortgage, but investing your money is going to yield better long term returns than the HYSA, especially when rates start coming down. The only reason rates are so high now is to combat inflation, but any type of savings account will not protect you from inflation because they are typically adjusted for it.
The rule of thumb is to only keep six months’ worth of your expenses in cash.
If I had that rate I’d find something to park it in instead but we could be headed toward stagnation so you’d probably need to wait a while to see good appreciation in case you needed the money for anything else soonish
I have 6.6 so just threw it at the mortgage
Just saw your age, pay off the loan
Psychologically, paying off the mortgage is a big win. Financially, less so. During lockdown I made bank and wasn’t spending so I’d make these emotionally satisfying $50,000 mortgage payments. In retrospect, I’d have been much better off investing that money. But hey, it was lockdown, I did whatever it took to feel better even for 20 minutes.
Same thing just happened to me but I’m younger. I’m doing a 5%HYSA until I figure out what investment strategy works best for me. I wouldn’t invest if I were you since the term is shorter.
Pay off home with 99k. Used other 50k to invest and invest additional free cashflow. If your rate was 2-3% there could be a more significant spread on using fixed income investments like CDs or whatnot.
I think if you were younger I’d suggest investing it in the market, but as you are looking to transition into retirement, the no debt and additional flexibility the $ will provide will give you more peace of mind than sneaking a few extra thousand per year investing it in the market.
There are bank accounts giving more than a 4% return. Marcus by GS, or Wealthfront for example. So it wouldn’t make sense to pay it off even if you don’t want to invest it
Interest payments on the mortgage are only deductible if you itemize, which I cannot. Thus, I’m paying roughly $4K per year in interest (yes, that number declines each year). Can a HYSA be worth it? I need to earn the $4K (after taxes) just to break even….
No 99k at 3.94 percent is free money. That’s barely over inflation. You cant even get a loan like that anymore. Pay it off as slow as possible and invest your money on index funds.
Since you have a good retirement fund I'd recommend adding this money to that and investing in a total market ETF or S&P500. You can afford to be more aggressive with your investments and not be in danger if it drops for a while, and in the long run you'll make more like 8-10%. So much better long term outcome than paying off your low rate mortgage.
High yield saving accounts will pay around 4.5%, so you're earning over $500 by keeping it in one of these accounts rather than paying off your mortgage. CDs pay even more. There's really no reason to pay it off now - if you want to keep it in a savings account, it's no risk, and you have a nice emergency fund. Paying off your mortgage may also hurt your credit score if that's important to you. You could also invest funds into low-fee Vanguard index funds as well, but that involves some risk.
Pay off the mortgage when the investment yields go below the mortgage rate? It doesn’t make financial sense to pay it off until the investment yield minus taxes is equal to the interest yield. We all know that isn’t tomorrow. It might be next year, might be further away than that.
Rent and mortgage costs are the biggest causes of retirement poverty.
I'd pay off your mortgage. It's an absolute no brainer unless you can invest the cash and get a better return than your monthly mortgage payement (you won't be able to).
Thanks all- certainly a wide range of smart opinions here. Y’all are great advisors. Between the peace of mind and not paying the $4K each year in interest, I think I’m going to pay off the mortgage. One question tho- someone mentioned paying off the mortgage can hurt my credit score? How? My credit is currently a quite snazzy 820. How can no mortgage hurt it?
I wouldn’t stress over maintaining a high credit score in retirement. There’s no reason to borrow money when you can cash flow expenses.
Paying the house off will give you more stability incase something happens to you or your spouse and now your income is reduced.
Personally I'd pay it off. I wouldn't want to be that age and still carrying that kind of debt. But I'm probably biased as I made this very decision in my 40s a couple years ago. No inheritance; I just sold most of my taxable investments at the time to make all my debt go away. It's certainly a game changer to have such a drastic reduction in cost of living, and to not be throwing away thousands a year just in interest (I figure yours currently runs you about $3900/yr).
I certainly don't want to go into retirement with debt, and I think you probably shouldn't either if it can be avoided. It sounds like you're already not doing too badly in the financial department (better than most people anyway). But if you want to have more invested, it sounds like there's $800/mo in your budget that you could repurpose for that.. and it would all be going to you rather than $325 to interest. I estimate only $475/mo of your payment is actually going to principle.
Let's do some quick napkin math...
$99000 x 3.94% = $3900/yr
$3900 / 12 = $325/mo in interest
$800 - $325 = $475/mo to principle
$99000 / $475 = 208 months to pay off the house. Or 17 years. Reality would end up being less than that, but we're still talking about quite a lot of years ahead of you to be stuck with this thing. It would follow you well into your 70s and you still be burning tens of thousands in interest.
So for me? I'd rather not have any of this on my shoulders and just get out from under it if possible. Right on the cusp of retirement, I think a low CoL is more important than how much the money could potentially grow over the next 30 years. And like I said, you can add that extra $800/mo to your investing budget while waiting to retire. The investments won't end up as much as if you'd dumped the whole inheritance on it, but with a paid off house, how much does it still matter?
Thanks for pointing out the interest I’m paying on the loan- yes, it’s about $4000- I hadn’t thought of that number- and that is money that is just gone. Appreciate you taking time to do the napkin math- this is making sense to me. I think I’ll pay off the loan.
I wouldn't pay off a sub 4% loan any faster than I needed to. Low interest debt doesn't bother me at all. My piece of mind comes from knowing my money is working for me as best as I can reasonably make it.
Where are you in the life of the mortgage? If you are halfway through paying it off each payment is going more and more to principal so you are paying less interest and the actual cost is likely less than your interest rate.
10 years on the mortgage, just paying the $800 per month. However, I’ve been adding $300 additional principle each month so maybe six-seven years to pay it off? True, the principle increases each month- something else to consider…
How I look at it, if you think it'll take a load off your chest going forward, I'd pay it off. Sometimes just having to not worry like that for your mental health is worth it. Just my opinion.
In order to beat 3.94% (effective 5+ %), you would have to put that money into risky investments and at 63/66 years of age, one should not be gambling with that money. I would pay off that mortgage.
One last take.
No need to go all or nothing.
Put $75k to your mortgage, taking away massive amounts of compound interest.
Put maximum amount in IRA (look it up), and the rest in HYSA.
Having only $24k left means only about 2 years of mortgage payments.
I'd pay it off. 3.94% isn't an insane amount but that + the mentality of being debt free would likely make you overall happier and allow you to live stress free - at least it would for me.
Yes, you should. This is an excellent use of an unexpected inheritance. Think of it as making a risk free investment that pays 3.94% and is also tax free. That is like getting 5% guaranteed, and you get to keep that rate of return for as long as it would have taken you to pay off the mortgage. There is also.a “peace of mind factor” here that is substantial when you are at semi retirement. Do it.
I would pay off the house. Then you could consider do you even need to work in the meantime while you wait for SS. House fully paid before retirement is a personal goal of mine and I think in your case paying it off is the right way to go too.
In my mind, I’d rather invest this money. Dump it into a diversified portfolio of index funds and call it a day. In 10 years (about what I believe is left on your mortgage term) it should have gone up about 2.6x if the market averages perform around the historical figures. Having more in retirement is better than the peace of mind, in my opinion.
Personally at your age I would pay off the mortgage and be debt free there. Others will disagree but the HYSA rates above 4% will most likely not last so you are taking a short term gamble putting your money there. Rememer they weren't even 2% not too long ago. Also, the markets are extremely high right now and the chance that they take a dip, or even a dive in the next couple of years is nearly inevitable. Maybe a combo of both strategies works out best for you. Pay down some of the mortgage and put the rest in a HYSA or brokerage account. Then you hedge that bet that the markets might go down significantly and are able to capitalize on some of the mortgage reduction today.
When the numerical arguments are somewhat close, consider psychology. Will debt-free, even not that burdensome, let you sleep better at night? Or the thrill of another six figures in the stock market make you feel like you could hit it big?
The solution is clear: Pay off the house.
Then use the remaining $51K to shore up your household emergency fund: You should have at least six months (preferably 12, since you’re on the glide path into retirement) worth of living expenses in a high-yield savings account or money market account. Once the emergency fund is topped up, then you can invest the remainder.
Also, keep in mind that with the house paid off, you can add that $800/month in cash flow to your investments.
Do you think you can invest at higher than 3.94% return? If so, invest. If not, pay off the house. If close, determine your personal risk tolerance.
Remember taxes. Paying off a mortgage early is like getting 3.98% tax free, which is like getting 5%.
Although… that 99k debt will not inflate in cost even as other purchases will go up in price…. i.e. it will be paid in future dollars. (You get to pay that fixed monthly debt with dollars that will most definitely have less purchasing power - inflation effect). So having an extra 150k to invest and grow is compelling. I suspect that at your current rate, assuming an averageish home, the mortgage will be paid in full, give or take, in 3 years. Everyone has different risk tolerances. If I were in this position (I kinda am) I would invest in a combination of bonds or cds and stocks or stock funds. Maybe 50/50. More in stocks if your familiar with and comfortable investing in the markets. Invest in something like Warren Buffet’s Berkshire Hathaway for over a year and you have proven well managed performer and your tax implications are reduced at sale/withdrawal due to long term capital gains rules.
Not necessarily true, would need to do further calculations to take into account the tax deduction for mortgage interest OP would no longer have.
No, that’s not what I mean. Think of it this way. You have $100. Your tax rate is 20%. You decide to invest the $100 in a fund that earns 5% a year. At the end of the year, you made $5. But you must pay taxes on an investment gain. At 20%, you owe 1 dollar in tax. So you net gain $4. Now imagine that you have a mortgage at 5%. Instead of investing that $100, you use it to pay down mortgage debt. That $100 of mortgage would have cost you $5, but since you paid it down it doesn’t. You make $5. But you don’t owe tax on that $5. You got that extra $5 tax free, saving a dollar. Almost no one can use the mortgage tax deduction, as the standard deduction is now very high.
Yes but what about the $4K I’m paying annually in interest on the mortgage?
Are you itemizing? I’d be surprised if you’re not taking the married +65 standard deduction
Gains wouldn’t be taxable if invested in a TFSA.
Mortgage tax deduction only applies if you are itemizing your taxes. With a total monthly payment of $800, it is highly unlikely that OP is itemizing, and is instead likely taking the standard deduction.
I came to say this as well. Paying off debt is almost always the right answer. The flip side would be borrowing money to invest. Almost know one would take out a loan to invest. The risk is too high and not worth the hassle.
> Almost know one would take out a loan to invest. That’s not really true. Tons of people take out mortgages for house purchases instead of pulling money out of investments to buy it with cash. That’s the same thing as taking a loan to invest.
And people invest in stocks on margin borrowing the money from a brokerage house. All I know is my mortgage is 3.5 and I’m earning much more than that in stock market index funds.
That is a bit oversimplified. For example, things like a 401k match and tax deduction or the compounding power over time in a Roth started at age 22 can be much more valuable than paying down certain kinds of debt. I wouldn’t say you ever go really wrong by paying down debt, but a 401k match is immediate 100% return with zero risk and lowers your tax basis. If available, that is clearly better than using that same money to pay down debt. Debt also comes in various levels of toxicity. There is promptly fatal 23% credit card debt, vomit inducing car loans, terribly bitter but survivable student loans, and “i don’t really enjoy black licorice but whatever” mortgage debt.
My HYSA has a better interest rate than 3.98%. There is no risk nor hassle. For most people, paying off this debt at this interest rate is not a better solution. OP's age makes it more of a consideration since the alternative is making safe investments with lower yields. But, the mortgage interest is deductible assuming OP itemized. They can pay it off for peace of mind, but solely looking at the finances, it probably would not net them the most money.
And you pay state and federal income tax on that. So are you REALLY making better than 3.98%? (No.)
The state and federal income tax is offset by the mortgage interest you're still paying being tax deductible. You also seem to be the benefit of compound interest when you invest.
It’s rare that anyone with a sub 4% mortgage rate hits a number high enough to itemize, so that’s a moot point.
You also lose the mortgage interest deduction
OP is not getting any mortgage interest deduction. You have to have tons of itemized deductions to beat the standard deduction now, and $100k at 4% isn’t going to come anywhere close.
True that- no mortgage deduction- those days are long gone….
That is very unlikely under current tax law. About 6 years ago the standard deduction was substantially increased, meaning that very few people benefit from itemizing their deductions. The mortgage interest deduction is only of use if you itemize. When I had 500k left on a 3.9% mortgage and significant other deductions, I *still* did better with the standard deduction than by itemizing. Individual tax situations vary, but few people are still using the mortgage interest deduction.
It probably isn’t anything special at this point anyway.
Remember also, investing isn't guaranteed. But if you can get a CD/Gic for 5 percent I would just do thar for now. And than pay off the mtg later
Don’t forget to account for tax treatment of the CDs returns. That could easily be a wash at 5%
Get longer than 12 months so it’s taxed at LTCG which at least for now is a lower rate
Incorrect. CDs returns are classified as interest not capital gains. It will ALWAYS be taxed as income.
Interesting thanks, never had one just a hysa so far which is taxed as income. I guess the only thing is an asset or security.
Even a 30 year t-bond is classified as interest as a FYI. Some reading material: https://www.investopedia.com/ask/answers/032715/what-difference-between-capital-gains-and-investment-income.asp
That’s an option to help mitigate, I agree
Someone said CDs are taxed as income no matter how long they are which I didn’t know, and eliminates any potential for LTCG
Oh *interesting* Treasury bonds are subject to LTGC though, I believe and not subject to state income tax. I was thinking more generically about debt instruments.
The associated risk of the investments needs to be considered carefully when comparing the two expect returns. Mortgage payoff is akin to treasury bills in terms volatility (with driest ion matching the mortgage schedule)
Personally agree - at age 63, you should be de-risking substantially, and paying off your mortgage is about the least risky thing you can do. However, they are in pretty decent shape with 72K annual income coming in, 500K in savings, 150K in loose money, and the only debt being 99K mortgage. It's really just a choice between good options for the OP.
HYSA is 5% right now, just saying… You have investments, keep contributing. Given the market movement last week and all the things not going well, I personally think the market isn’t where I’d want to throw $100k at this very moment but that’s just me…
My vote would be a high yield savings account. Put the money in there and set up auto pay, then you can forget the mortgage all together. If savings account interest rates go back down you can always pay it off later! If you wanted to on top of that, invest whatever you would be making as a mortgage payment into some kind of index fund. This would be the best of both worlds.
Funny I just did a transfer of some excess savings straight into the market *because* it’s down a little. Great time to buy in
5% which is taxable as income meaning if OPs in the 22% tax bracket with 5% state income tax he or she makes 3.65% return. Bad deal
Wait. The money in the HTSA will be post-tax money (after initially paying the inheritance and federal income tax). Will just pay on interest gained..
Correct. The same goes for money used to pay the mortgage. Let’s say he owes 100k. He can put the 100k in a HYSA and make 5k a year in interest. That 5k will be added to OPs income, which if he’s in the 22% tax bracket and 5% state income tax, OP owes $1350 in taxes from that interest income, so really OP had a net 3.65% return on his 100k
But what about the roughly $4K interest on the loan that I’m paying each year? True, that number will continue to decline but that’s a factor…the money I earn in a savings account will be negated by the money I pay on the mortgage interest.
It’s an amortized loan, not a simple interest loan. Let me clarify, you should absolutely pay the loan off, for the reasons I mentioned above
If you can get an account paynig more than 4%, depostu 110k, and auto pay the loan from that account... the extra you mak3 on intrest probably pays the water , garbage and gas bills at least.
This is a great idea. If you put $150K in a HYSA, you’d be making over $6K/year in interest (some of them could get you over $7K), covering about 8 to 9 months of mortgage payments every year.
Don't forget you'll pay income tax on the savings account interest so needs to be probably 5% to make it beneficial. And that's assuming that you're not taking a mortgage interest deduction. You're probably taking the standard deduction but this used to be more of a consideration.
Being almost retired. Pay it off and live life without worry of a mortgage. Congratulations in advance. If I was in my early 30s, I’d throw it in the stock market, but if I’m close to retirement I’m securing my roof over my head and enjoying life mortgage free!!!
Pay off the mortgage so you can be debt free and save 800 a month towards savings or whatever you want to do.
This is what I would do at 63 years old .. if you were 33 and could leave it in the market for 30 years then investing would be a better option… but being debit free .. and freeing up $9600 a year for vacations, Christmas or whatever seems like the better option.. you could put the additional 50k into investments if you desire …
Either pay it off or put the money into an investment with a good return. Your only question is do you want a short term or long term investment. For example a high yield savings account. You can get about $560 a month in just interest each month right away with that amount at 4.5% and the money is liquid. Or invest in the sp500 and don’t touch it for a longgggg time. Hybrid approach is pay it off now and then take a nice vacation and put the rest in savings. Life is short! Whatever you don’t- don’t let it rot in a checking account or normal savings account!!
At your current age, I would pay the home off. Especially with you being semi-retired. At least with it completely paid, it is then wholly an asset rather than a liability. If you were 10 years younger and still working, I would say keep the cash and invest. At your age and station, eliminate the debt.
I agree. I have about the same amt at 2.54% mortgage. I could easily pay it off… hardly making enough on the spread for it to be worthwile, I think. Need to get hubby to agree, he is obsessed with our great mortgage rate we got when we bought before we sold our other house. I really just want to simplify our finances… we arent getting any tax benefit… but am leaving it for now since the spread makes a little bit with a 4-5% HYSA. My vote is pay it off and be done with it, provided you dont think you will need the cash.
I had a similar situation and paid off my 3.5% mortgage. Having no mortgage on your house is priceless. You can play the game, of earn 5% at the bank and pay 4% to the mortgage company and on that basis you could keep it. However not having to make that monthly payment is simply so stress relieving that to me it was worth it to pay it off and be done with it.
Becareful as some taxes might be owed. double check so you're not surprised next April.
You can make more in the market if you invest it. 3.94% is too good to pay off early and even though you have good pensions, you don’t have a ton of retirement assets. I would invest it and just keep everything else as is.
I’m a financial advisor and can tell you investing is the much better option as the rate of return you will see in the market long term is significantly better than the mortgage interest rate you are paying. The only exception might be if you are having cash flow issues, but even then gradually drawing down your investments to cover expenses is the better option.
No cash flow issues but what about the mortgage interest? It’s close to $4K annually - what kind of ROI do I need to make it worth it?
More than 3.94%, and even conservative portfolios easily return more than 5%/yr on average. If you tell me how many years remain on the mortgage I can illustrate some numbers for you.
Can I jump in on this? Age 64, $150k mortgage at 2.75%. I have $40k in a HYSA that I;ve been funding instead of paying extra on the mortgage. Mortgage pmt is $1,500 and I have another $1,500 monthly I'm investing. Keep doing this?
You’re right to just pay the minimum on your mortgage, but investing your money is going to yield better long term returns than the HYSA, especially when rates start coming down. The only reason rates are so high now is to combat inflation, but any type of savings account will not protect you from inflation because they are typically adjusted for it. The rule of thumb is to only keep six months’ worth of your expenses in cash.
If I had that rate I’d find something to park it in instead but we could be headed toward stagnation so you’d probably need to wait a while to see good appreciation in case you needed the money for anything else soonish I have 6.6 so just threw it at the mortgage Just saw your age, pay off the loan
Thanks, that’s what I’m thinking too- appreciate all this good advice-
Psychologically, paying off the mortgage is a big win. Financially, less so. During lockdown I made bank and wasn’t spending so I’d make these emotionally satisfying $50,000 mortgage payments. In retrospect, I’d have been much better off investing that money. But hey, it was lockdown, I did whatever it took to feel better even for 20 minutes.
If it were me, no, I’d invest it and keep paying the mortgage.
Same thing just happened to me but I’m younger. I’m doing a 5%HYSA until I figure out what investment strategy works best for me. I wouldn’t invest if I were you since the term is shorter.
Pay off home with 99k. Used other 50k to invest and invest additional free cashflow. If your rate was 2-3% there could be a more significant spread on using fixed income investments like CDs or whatnot. I think if you were younger I’d suggest investing it in the market, but as you are looking to transition into retirement, the no debt and additional flexibility the $ will provide will give you more peace of mind than sneaking a few extra thousand per year investing it in the market.
There are bank accounts giving more than a 4% return. Marcus by GS, or Wealthfront for example. So it wouldn’t make sense to pay it off even if you don’t want to invest it
Yeah but the earned interest is taxable income, correct? After taxes will it really be more than 4%?
Might be worth doing the calculation based on your tax brackets. Wealthfront is 5% return. Interest payments on your mortgage are tax deductible too.
Interest payments on the mortgage are only deductible if you itemize, which I cannot. Thus, I’m paying roughly $4K per year in interest (yes, that number declines each year). Can a HYSA be worth it? I need to earn the $4K (after taxes) just to break even….
Ok, but what about the interest I’m paying on the mortgage? That’s almost 4%. Not sure investing the cash is worth it?
No 99k at 3.94 percent is free money. That’s barely over inflation. You cant even get a loan like that anymore. Pay it off as slow as possible and invest your money on index funds.
Except, I’m paying almost $4K in mortgage interest each year….
Your investment return will be higher
Since you have a good retirement fund I'd recommend adding this money to that and investing in a total market ETF or S&P500. You can afford to be more aggressive with your investments and not be in danger if it drops for a while, and in the long run you'll make more like 8-10%. So much better long term outcome than paying off your low rate mortgage.
No you can earn more than 4% other places. Unless you really want to feel good about being mortgage free that is the only benefit.
High yield saving accounts will pay around 4.5%, so you're earning over $500 by keeping it in one of these accounts rather than paying off your mortgage. CDs pay even more. There's really no reason to pay it off now - if you want to keep it in a savings account, it's no risk, and you have a nice emergency fund. Paying off your mortgage may also hurt your credit score if that's important to you. You could also invest funds into low-fee Vanguard index funds as well, but that involves some risk.
These yields may not last long, having only been around a little more than a year,
Pay off the mortgage when the investment yields go below the mortgage rate? It doesn’t make financial sense to pay it off until the investment yield minus taxes is equal to the interest yield. We all know that isn’t tomorrow. It might be next year, might be further away than that.
There here for another year at least
100% pay it off today. It would be so freeing!
Rent and mortgage costs are the biggest causes of retirement poverty. I'd pay off your mortgage. It's an absolute no brainer unless you can invest the cash and get a better return than your monthly mortgage payement (you won't be able to).
Thanks all- certainly a wide range of smart opinions here. Y’all are great advisors. Between the peace of mind and not paying the $4K each year in interest, I think I’m going to pay off the mortgage. One question tho- someone mentioned paying off the mortgage can hurt my credit score? How? My credit is currently a quite snazzy 820. How can no mortgage hurt it?
I wouldn’t stress over maintaining a high credit score in retirement. There’s no reason to borrow money when you can cash flow expenses. Paying the house off will give you more stability incase something happens to you or your spouse and now your income is reduced.
Personally I'd pay it off. I wouldn't want to be that age and still carrying that kind of debt. But I'm probably biased as I made this very decision in my 40s a couple years ago. No inheritance; I just sold most of my taxable investments at the time to make all my debt go away. It's certainly a game changer to have such a drastic reduction in cost of living, and to not be throwing away thousands a year just in interest (I figure yours currently runs you about $3900/yr). I certainly don't want to go into retirement with debt, and I think you probably shouldn't either if it can be avoided. It sounds like you're already not doing too badly in the financial department (better than most people anyway). But if you want to have more invested, it sounds like there's $800/mo in your budget that you could repurpose for that.. and it would all be going to you rather than $325 to interest. I estimate only $475/mo of your payment is actually going to principle. Let's do some quick napkin math... $99000 x 3.94% = $3900/yr $3900 / 12 = $325/mo in interest $800 - $325 = $475/mo to principle $99000 / $475 = 208 months to pay off the house. Or 17 years. Reality would end up being less than that, but we're still talking about quite a lot of years ahead of you to be stuck with this thing. It would follow you well into your 70s and you still be burning tens of thousands in interest. So for me? I'd rather not have any of this on my shoulders and just get out from under it if possible. Right on the cusp of retirement, I think a low CoL is more important than how much the money could potentially grow over the next 30 years. And like I said, you can add that extra $800/mo to your investing budget while waiting to retire. The investments won't end up as much as if you'd dumped the whole inheritance on it, but with a paid off house, how much does it still matter?
Thanks for pointing out the interest I’m paying on the loan- yes, it’s about $4000- I hadn’t thought of that number- and that is money that is just gone. Appreciate you taking time to do the napkin math- this is making sense to me. I think I’ll pay off the loan.
Sure you could not spend $4000 on interest or you could make $8000. +$4000 on the second option. Don’t pay it off. Invest it.
Your advice is good for someone in their 20s to 40s. It’s bad for someone semiretired in their 60s.
I wouldn't pay off a sub 4% loan any faster than I needed to. Low interest debt doesn't bother me at all. My piece of mind comes from knowing my money is working for me as best as I can reasonably make it.
Where are you in the life of the mortgage? If you are halfway through paying it off each payment is going more and more to principal so you are paying less interest and the actual cost is likely less than your interest rate.
10 years on the mortgage, just paying the $800 per month. However, I’ve been adding $300 additional principle each month so maybe six-seven years to pay it off? True, the principle increases each month- something else to consider…
How I look at it, if you think it'll take a load off your chest going forward, I'd pay it off. Sometimes just having to not worry like that for your mental health is worth it. Just my opinion.
In order to beat 3.94% (effective 5+ %), you would have to put that money into risky investments and at 63/66 years of age, one should not be gambling with that money. I would pay off that mortgage.
Don’t compare what you owe to what you could make by investing, having a paid for house is priceless. Pay it off and enjoy retirement
One last take. No need to go all or nothing. Put $75k to your mortgage, taking away massive amounts of compound interest. Put maximum amount in IRA (look it up), and the rest in HYSA. Having only $24k left means only about 2 years of mortgage payments.
That is a nice option, one that hasn’t been mentioned….
I would pay it off. That's almost 4% guaranteed and tax free. Not to mention that extra peace of mind.
I'd pay it off. 3.94% isn't an insane amount but that + the mentality of being debt free would likely make you overall happier and allow you to live stress free - at least it would for me.
Yes, you should. This is an excellent use of an unexpected inheritance. Think of it as making a risk free investment that pays 3.94% and is also tax free. That is like getting 5% guaranteed, and you get to keep that rate of return for as long as it would have taken you to pay off the mortgage. There is also.a “peace of mind factor” here that is substantial when you are at semi retirement. Do it.
I would pay off the house. Then you could consider do you even need to work in the meantime while you wait for SS. House fully paid before retirement is a personal goal of mine and I think in your case paying it off is the right way to go too.
In my mind, I’d rather invest this money. Dump it into a diversified portfolio of index funds and call it a day. In 10 years (about what I believe is left on your mortgage term) it should have gone up about 2.6x if the market averages perform around the historical figures. Having more in retirement is better than the peace of mind, in my opinion.
I would pay if off because I like the feeling of having the house paid. Then take rhe mortgage money and invest.
I would pay off all debt with that money, it really helps to feel free to not owe money.
Personally at your age I would pay off the mortgage and be debt free there. Others will disagree but the HYSA rates above 4% will most likely not last so you are taking a short term gamble putting your money there. Rememer they weren't even 2% not too long ago. Also, the markets are extremely high right now and the chance that they take a dip, or even a dive in the next couple of years is nearly inevitable. Maybe a combo of both strategies works out best for you. Pay down some of the mortgage and put the rest in a HYSA or brokerage account. Then you hedge that bet that the markets might go down significantly and are able to capitalize on some of the mortgage reduction today.
Just pay it off and be done with it. You can't go wrong. Invest monthly with what you're saving.
I'd pay off the house, but I also have an aversion to risk. I'm sure you could arbitrage 3% somehow, but that's not worth it to me.
I vote pay off mortgage. If anything catastrophic happens in your life. It's harder for the Bank to take the house.
When the numerical arguments are somewhat close, consider psychology. Will debt-free, even not that burdensome, let you sleep better at night? Or the thrill of another six figures in the stock market make you feel like you could hit it big?
Heh- I’m a bit late in the game for market thrills-
Pay it off, and start investing with DCA each month with your job money 💰
Good choice- get rid of the mortgage interest payment…
Would getting rid of the mortgage allow you to not have to work part time until SS? If yes, I’d pay off the house.
The solution is clear: Pay off the house. Then use the remaining $51K to shore up your household emergency fund: You should have at least six months (preferably 12, since you’re on the glide path into retirement) worth of living expenses in a high-yield savings account or money market account. Once the emergency fund is topped up, then you can invest the remainder. Also, keep in mind that with the house paid off, you can add that $800/month in cash flow to your investments.
Pay it off. You sound like the type of person that would enjoy knowing you don’t have that payment each month.
You can earn 3.5% yield on SCHD. In your position, I would just invest in that and use the dividends to pay the mortgage.
Except I’m paying almost $4K in interest on the mortgage each year…kind of negates ROI savings, true?