Hypothetical Question: Would You Payoff Mortgage?

[greenskeeper]

Let's say you're 32. Let's say your assets look like this:

Cash: 40k
Mutual Fund: 75k
401k: 70k
Roth: 3k
House Value: 135k
Vehicle 1: 11k
Vehicle 2: 7.5k
Bonds: 2k
Total Assets 343.5k

Let's say your liabilities look like this:

Ashley Furniture 4k
Mortgage 102k
Total liabilities: 108k

Let's say your household income is 64k.

I would pay off the mortgage. Can't sleep under a piece of paper or online statement if things go bad.

[Petunia 100]

Let's say you're 32. Let's say your assets look like this:

Cash: 40k
Mutual Fund: 75k
401k: 70k
Roth: 3k
House Value: 135k
Vehicle 1: 11k
Vehicle 2: 7.5k
Bonds: 2k
Total Assets 343.5k

Let's say your liabilities look like this:

Ashley Furniture 4k
Mortgage 102k
Total liabilities: 108k

Let's say your household income is 64k.

In this situation, no, I would not cash in the taxable mutual fund to pay against the mortgage.

What I might do though is think about a target date for my retirement. Like, if I wanted to try to retire at age 50, I would calculate what I needed to pay on the mortgage to have it paid in full by age 50. I would pay that, and then contribute as much to my investments as I could.

When I reach 50, my mortgage is paid in full. I look at my investment accounts and see if I can live on them from now on. If yes, great. If not, I keep working until the answer is yes.

[Petunia 100]

I would pay off the mortgage. Can't sleep under a piece of paper or online statement if things go bad.

True. Can't buy groceries or utilities with a paid off mortgage, either.

[MonkeyMama]

Personally, I'd pay the mortgage down enough so that most the payments were going to principal. I never get into the either/or discussions so much. A little of both sounds good to me. Pay less interest but keep a chunk of your investments.

That said, tax ramifications should be considered. (I answer this way because we likely would not pay any taxes on selling investments).

[Goldy]

I would not cash the funds to pay down the mortgage if it were me. It's a decent rate and a pretty small balance all in all. Since you have hypothetically been able to save 40k in cash I would pay extra on the mortgage each month and would reduce the cash I had on hand to 6 month EF by maxing out the Roth for a couple years.

[snafu]

How good is your crystal ball? Is it your plan to live in that house as a retiree? I too wondered the ratio principal to interest of your mortgage payments. You aren't obliged to sell 100% of the MF, you could sell some units in late November and some each year subsequently, having worked out the income tax implications, to apply directly to the principal. If the family is onboard with your plan, you could increase your monthly payment with a set sum going directly to principal. Some participants on SA apply any non-salaried income, whatever the source, wherever the savings directly to their mortgage principal beating it down significantly.

[greenskeeper]

True. Can't buy groceries or utilities with a paid off mortgage, either.

But without having a mortgage any money I could scrap together could be used for monthly expenses. A mortgage is for the majority of people their biggest monthly expense. Without out it the amount you need each month is significantly less.

[Eagle]

Thanks all. Lot's to consider. DW and I talked it over this weekend. Getting the mortgage under 100k is our goal this year. We really are still debating on cashing out the MF. Perhaps we'll consider cashing out a portion of it instead. Having a 25-30k mortgage instead of 100k really is appealing.

These two were very compelling arguments someone made to us:

#1, you always need a place to live, and a house is first and foremost that, and second it's an asset.

#2, guaranteed growth at greater than 5% is going to require riskier investments.

Keep the suggestions coming though. This is an ongoing process. We'll probably make a decision this month.

[PDM]

Would you pay off a mortgage

I have a similar question to a previous post, but my circumstances are different.
I am only in my third year of a 30 year mortgage with a balance of 130,000. I have approximately $220,000 in my 401K. To avoid paying mortgage interest for the next 27 years on a fixed income, should I pay off the mortgage balance from my 401K?

I should have added that I am only six months from retirement

[Eagle]

I have a similar question to a previous post, but my circumstances are different.
I am only in my third year of a 30 year mortgage with a balance of 130,000. I have approximately $220,000 in my 401K. To avoid paying mortgage interest for the next 27 years on a fixed income, should I pay off the mortgage balance from my 401K?

I should have added that I am only six months from retirement

First welcome to the forums.

According to a somewhat recent article in February 2014 with data compiled by Fidelity one in three 401k participants have cashed out of his or her plan, often when changing jobs.

Cashing out a 401k is an easy way to generate a short-term cash need. But it’s a bad idea in my opinion. First, there's the potential long-term growth.

Second, if you do cash out your 401k typically your plan administrator will withhold 20% of the balance and sends it to the IRS to cover the taxes you'd pay in a withdrawal.

On top of that investors younger than 59 1/2 who cash out may face an additional 10% early withdrawal penalty.

So in essence you'd pay a 30% in taxes on cashing out a 401k. That's the way I understand it anyway. Others may have more input or insight.

Typically, on a mutual fund you can expect to pay 15% taxes on the gains on an investment. Still hurts but not as bad as 30%.

[JasonSimms]

Exactly! It would normally depend on how old you are and what other assets you own. And as far as peace of mind is concerned, you can’t expect to achieve it so easily if you are not able to get your desired ROI out of your investments! So I suggest you better consult a practiced financial advisor having lots of industry experience with monetary investments!

[Petunia 100]

Exactly! It would normally depend on how old you are and what other assets you own. And as far as peace of mind is concerned, you can’t expect to achieve it so easily if you are not able to get your desired ROI out of your investments! So I suggest you better consult a practiced financial advisor having lots of industry experience with monetary investments!

And I suggest you avoid them like the plague.

[dojo]

Given the fact both hubs and self hate any form of debt, we'd probably do anything we can to get rid of it. You did get a lot of excellent ideas regarding the other option, though and some make a lot of sense. Keep us posted with your progress, would love to see what you'll decide

[Eagle]

Given the fact both hubs and self hate any form of debt, we'd probably do anything we can to get rid of it. You did get a lot of excellent ideas regarding the other option, though and some make a lot of sense. Keep us posted with your progress, would love to see what you'll decide

We pay our mortgage bi-weekly. On top of that we pay an extra $150-900 a month on the mortgage.

Bought the house last year in October 2013. So 12 months.

So I imagine most of what we're paying is interest right now. The payment is $872 a month.

No PMI we put 20% down.




All that said...

Kind of been kicking around the idea today of getting 30k cash, cashing in the mutual fund, and paying off the house this year.

I know I know... Crazy...

We'd still have 10k in cash though. And no monthly payment.

[MonkeyMama]

I don't think it's crazy. I would personally not cash out everything down to $10k. Why not just cash out the mutual funds and pay what you can? Save up to knock out the rest as quickly as possible. At your age there really isn't a right or wrong answer. Will you commit to put house payments to investments, going forward? (I certainly would, if we no longer had a house payment). Debt-free and investing is a very fine place to be at your age.

Do you know the tax ramifications of selling your mutual funds? Is this your forever home or will you be more motivated to buy up with the paid-for home? That may be one reason to not consider paying it off. IF you are talking "mortgage free forever, or for a very long time" I think this would be a better plan than otherwise. Simply because continuing to save for a home will take away from other investments and savings.