Paying off Mortgage vs Not

[Joeponcho]

Hello,

  My Wife & I have an annual combined income of ~150K, we both have 401K's (equivalent) and some IRA's. In the 401K's we have close to

~1 Million. Our IRA's are at about 300K. Our house in the current market is worth about ~400K. I'm 53, She's 51, our kids are 11 & 12. I plan on Retiring in about 5-7 years. I also have a Pension from my job upon Retirement. We owe 25K on our mortgage and I was gonna close an online CD I have that is making 0.5% (ridiculous) and pay off the mortgage and start investing the equivalent of our Mortgage Payment for the kids future. We have 529's for the Kids but I want to diversify in case one of them doesn't go to College. I was thinking maybe investing that in a ROTH? For tax purposes is this a good move? I figured that taking money out of a CD. that's making 0.5% and paying off the mortgage with a rate of "3 point something" is smarter.

[SouthJamaica]

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@Joeponcho wrote:

Hello,

  My Wife & I have an annual combined income of ~150K, we both have 401K's (equivalent) and some IRA's. In the 401K's we have close to

~1 Million. Our IRA's are at about 300K. Our house in the current market is worth about ~400K. I'm 53, She's 51, our kids are 11 & 12. I plan on Retiring in about 5-7 years. I also have a Pension from my job upon Retirement. We owe 25K on our mortgage and I was gonna close an online CD I have that is making 0.5% (ridiculous) and pay off the mortgage and start investing the equivalent of our Mortgage Payment for the kids future. We have 529's for the Kids but I want to diversify in case one of them doesn't go to College. I was thinking maybe investing that in a ROTH? For tax purposes is this a good move? I figured that taking money out of a CD. that's making 0.5% and paying off the mortgage with a rate of "3 point something" is smarter.

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I don't know about tax purposes but it sounds like a great idea to put the mortgage in the rear view mirror.

You might get dinged in some of your FICO scores, but it doesn't sound to me like you need any credit.

[nzbgsf]

Paying off your mortgage at this point would make perfect sense if your CD funds are earning 0.5% APY. You are most likely no longer able to deduct much in the way of interest at this point on your Schedule-A. Plus after inflation, interest in CDs are negative "real return".

Diverting an equivelent amount of your mortgage payments into an investment account also could work to your advantage. Roth IRA would allow after-tax contributions and tax-deferred growth, for retirement tax free income (your contributions are always accessible for emergencies). Net net you will probably be better off in the long run by saving the 3.?? interest and potentially receiving a higher return on your principal. Also, I suggest consulting with a financial planner to explain the pros and cons & they might help you to come up with smart solutions for your finances. 

[Joeponcho]

Thank you SouthJamaica!

[Joeponcho]

Thanks for your thoughts Nzbgbf! I appreciate your feedback.

[Anonymous]

I'm going to disagree with the other responses. I think it's a bad idea. 0.5% definitely is a terrible rate and paying off the mortgage would save you much more money than you can earn on that CD. However, financially it makes the most sense to invest the full balance of the CD as long as you don't think it's going to be needed in the next few years. The average rate you would gain on the stock market with the money would outweigh the interest on your mortgage by a lot. Do you have much time left on the mortgage?

Another reason why you probably shouldn't pay it off now is due to inflation. When inflation is higher than your APR, you are effectively paying less over time now than you were before. You are losing out on a lot of money by paying it off now. This is why I and others like to refer to low interest debt like this as "good debt". You are earning money on keeping the debt.

[SouthJamaica]

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@Anonymous wrote:

I'm going to disagree with the other responses. I think it's a bad idea. 0.5% definitely is a terrible rate and paying off the mortgage would save you much more money than you can earn on that CD. However, financially it makes the most sense to invest the full balance of the CD as long as you don't think it's going to be needed in the next few years. The average rate you would gain on the stock market with the money would outweigh the interest on your mortgage by a lot. Do you have much time left on the mortgage?

Another reason why you probably shouldn't pay it off now is due to inflation. When inflation is higher than your APR, you are effectively paying less over time now than you were before. You are losing out on a lot of money by paying it off now. This is why I and others like to refer to low interest debt like this as "good debt". You are earning money on keeping the debt.

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Stocks go up sometimes, and down sometimes.

[Yankee2]

Debt free is never a bad thing, especially when so close to retirement.

I'm in a very similar situation as you, but don't have near as much saved up. I paid my mortgage off a couple years ago and it was the best thing I ever did.

Right now I Bonds are a great investment, but it's limited to $10,000 s year. (It's earning over 7% with zero risk) that can be used if you wanted an investment for your mortgage payment.

[SouthJamaica]

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@Yankee2 wrote:

Debt free is never a bad thing, especially when so close to retirement.

I'm in a very similar situation as you, but don't have near as much saved up. I paid my mortgage off a couple years ago and it was the best thing I ever did.

Right now I Bonds are a great investment, but it's limited to $10,000 s year. (It's earning over 7% with zero risk) that can be used if you wanted an investment for your mortgage payment.

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Here's an article about Series I US Savings Bonds:

https://www.forbes.com/advisor/investing/what-are-i-bonds/

[Anonymous]

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@SouthJamaica wrote:

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@Anonymous wrote:

I'm going to disagree with the other responses. I think it's a bad idea. 0.5% definitely is a terrible rate and paying off the mortgage would save you much more money than you can earn on that CD. However, financially it makes the most sense to invest the full balance of the CD as long as you don't think it's going to be needed in the next few years. The average rate you would gain on the stock market with the money would outweigh the interest on your mortgage by a lot. Do you have much time left on the mortgage?

Another reason why you probably shouldn't pay it off now is due to inflation. When inflation is higher than your APR, you are effectively paying less over time now than you were before. You are losing out on a lot of money by paying it off now. This is why I and others like to refer to low interest debt like this as "good debt". You are earning money on keeping the debt.

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Stocks go up sometimes, and down sometimes.

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That is true. That's why I suggested they only do, it if they don't need the money for a few years. Index funds for a few years should gain them a good overall return. Even if we have another 2020 on our hands for one of those years.

With that being said. I-bonds are a good idea as well. The only issue is it will give you a poor return if inflation goes back down to what it has been for the last few years.