Financial Advice - Should I pay off my house early?

[Caardvark]

I'm hoping one of the more financially astute members here can help me make a decision. Through grants, bonuses and an ESPP I have accumulated a bit of stock at the company I work. I've always thought of this account as gravy rather than an actual investment portfolio (My wife and I have other retirement accounts that are on track for our goals). However, over the past couple of years our stock has done pretty well and this account is currently worth about $350K. And this, got me thinking... Should I sell it and pay off my house?

If it were cash, I'd lean toward paying off the house because I think I can earn >4% (my mortgage interest) through other investments. But... It's not cash. I'd have to sell the stocks, pay capital gains (15%) and then pay off the house with the remaining cash. And, this is where I'm stuck. How should I be doing this math? Am I better off keeping this money invested (assuming I can earn >4%) or pay off the house?

Any advice would be appreciated!

DP's

Purchased home: January 2013

Purchase Amount: $490K

Current Value: ~$730K
Original Mortgage Amount: ~$392K

Principal Remaining: $297K

Interest Rate: 4.0%

[SouthJamaica]

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@Caardvark wrote:

I'm hoping one of the more financially astute members here can help me make a decision. Through grants, bonuses and an ESPP I have accumulated a bit of stock at the company I work. I've always thought of this account as gravy rather than an actual investment portfolio (My wife and I have other retirement accounts that are on track for our goals). However, over the past couple of years our stock has done pretty well and this account is currently worth about $350K. And this, got me thinking... Should I sell it and pay off my house?

If it were cash, I'd lean toward paying off the house because I think I can earn >4% (my mortgage interest) through other investments. But... It's not cash. I'd have to sell the stocks, pay capital gains (15%) and then pay off the house with the remaining cash. And, this is where I'm stuck. How should I be doing this math? Am I better off keeping this money invested (assuming I can earn >4%) or pay off the house?

Any advice would be appreciated!

DP's

Purchased home: January 2013

Purchase Amount: $490K

Current Value: ~$730K
Original Mortgage Amount: ~$392K

Principal Remaining: $297K

Interest Rate: 4.0%

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It's not clear to me if this is a tax sheltered type of retirement account. That's something I would need to know.

IMHO the peace of mind that comes from owning one's house free and clear outweighs having to pay some capital gains tax. But if I had to take a penalty on top of that, I probably wouldn't. I'd probably just convert the stock to money market funds or treasuries, but leave it in the retirement account or roll it over somewhere, so I'll know the money is there for me.

[Shooting-For-800]

I would never pay off a house early (with a decent interest rate) unless I had literally $0 debt, $0 future major purchases to buy, and so many investments I could not keep track of them.

No car loans?

No credit card balances?

No home repairs needed?

No new car purchases soon?

Plenty of savings?

If you have extra cash flow, which obviously you do, you could always just double or triple your payment and make a huge dent over a short period of time.

This prevents future issues with cash flow and/or gives you the tax write off advantage if you use it.

I cannot tell you how many people (especially elderly) that have paid of their house early and then needed money they could not get later.

If you are worried about your stock going down, take some (or all) out and diversify your investments to lower risk.  If you want a buffer, you could cash out $50k and throw it in the bank allowing you to make extra payments, repairs, etc.

Something like:

$100k left in account

$100k S&P 500 mutual funds

$50k in ultra conservative mutual funds

$50k in CDs

$50k in Savings

The idea is to keep as much as possible in RETIREMENT accounts

If your mortgage APR is high, I would look at refinancing at a lower rate before I would pay it off if the closing costs make sense.

I would NEVER take a cap gain tax hit to pay off a tax deduction early.

GL!

[Anonymous]

You'd have to look at a number of things:

*  The mortgage permits you to deduct interest on your federal taxes.  Figure out how much you pay in interest on the loan (an expense) - how much you gain by the deduction.  That will enable you to reassess the actual cost of the loan.

*  Are you fairly confident that, if you left the stock untouched until retirement, you would likely make an average return of > 4%?  Or by contrast do you have reason to believe that the stock has done unusually well but will likely fare badly in the years to come?  The result of this kind of analysis should result in you coming up with an estimated rate of return for the stock between now and retirement -- and that in turn will help you decide whether to sell now or not.

[Shooting-For-800]

I would NEVER pay off a 4% mortgage off early.

4% is nothing.  I would keep a year's worth of salary in the CDs and savings before I would pay an extra penny towards a 4% mortgage on a home with great equity already.

There are savings and CD accounts that pay almost 4% not to mention any stock investing.

I would call your mortgage company and ask about advanced payments and whether or not paying ahead with push back your due dates.  Some do, some don't.  If the do, you could take out $50k or so and start making your entire monthly payment every two weeks.  This would push your equity up and your payment due dates back so you could build a buffer (like paying off your home would do.)

2 payments per month for a year would give you cash flow and a year's buffer to never worry about making your payment on time again.  

Just a thought.  

[Caardvark]

Thank you all for your input!

@SouthJamaica

• It is not a tax sheltered account. It is a "gravy" account that got biger than expected

@Anonymous 

• Great point about the Mortgage Interest Deduction. I forgot out about  that (doh!). 
• Regarding the expected return - If I don't pay off the house I'd still likely sell some and diversify. I'm 42 years old so, still quite a few years away from retirement. And, based on the history of the S&P, yes, pretty confident an index fund could beat 4% (crosses fingers)

@Shooting-For-800

I would NEVER take a cap gain tax hit to pay off a tax deduction early ---> I think this might be it

SJ is absolutely right about the peace-of-mind of paying it off (which is why I've been considering it in the first place). But, at the end of the day, I think I'd prefer the math to make the decision. My brain has been telling me it makes more sense to keep the 4% mortgage and keep the money invested but I want to make sure I I'm not miscalculating or missing some other financial implication. 

Thank you all again for your input. I'm now leaning very heavily to simply diversifying this account, mostly into index funds with the rest split between 1)leaving it alone in company stock and 2) play money (play investing

[krielly]

The tax deduction may or may not be a factor since the changes for 2018. Many of us no longer benefit from a home mortgage interest deduction, because the standard deductions were raised high enough that they now exceed the itemized deductions. We've itemized for years, but in 2018 just took the standard deduction. Just food for thought.

[Shooting-For-800]

Last thought...you have a fixed mortgage (I assume).  It was not that long ago when mortgage rates were a lot higher.  

As the dollar is worth less and less, your mortgage stays the same (mostly) and at about the lowest rate possible for the next 20+ years.

Brief history of 30 year rates:

2010 = 5% +

2008 = 6% +

2002 = 7% +

2000 = 8% +

1994 = 9% +

1990 = 10% +

1987 = 11% +

1985 = 13% +

1984 = 14% +

1982 = 17% +

1981 = 18% +

Imagine paying 18% on your mortgage!  

Anyway, you get the idea.