WWYD? Cash in Investment to Pay Off Mortgage Question

[Eagle]

WWYD? We are on Baby Steps 4 (Save at least 15% Retirement)/5 (Save for Kids College)/6(Early Mortgage Payoff) of Dave Ramsey’s program. We are saving about 17% of our gross income for retirement.

We are 35 and 34 years old. We have two young children and a baby on the way.

Income:
76.4k gross per year

Net Income: (I get paid on Fridays)
$3,827 (Months with 4 Fridays)
$4,783 (Months with 5 Fridays)

We generally budget about $3000 in expenses and the rest is budgeted towards savings or house payoff.

We have a net worth of about 332k.

Assets:
Cash – 13k
401k & – 118.2k
Roth IRA – 8.3K
Fidelity Investment – 87.9k
Vanguard Star 1 – 5.8k
Vanguard Star 2 – 5.9k
House – 160k
Car (Honda Civic 2007) – 8.5k
Van (Toyota Sienna 2004) – 6k

Debts:
89.2k principle at 4.625% Interest. Note: We paid 20% down so no PMI.

We currently can pay about $5500 extra towards the principle of the mortgage each year. At this rate it would take 16 years to pay off the house.

My next promotion at work should theoretically be within the next 18-24 months. This would likely be a pay raise of about 15-20k.

We currently have a non-retirement, Fidelity mutual investment with a balance of 87.9k. We owe 89.2k on our mortgage.

For perspective on the Fidelity Investment...
From memory, in 2008/2009 this investment was worth about 35-40k. In Jan 2013 it was worth 56.4k.
We have not added anything to the account since that time.
It was originally money set aside for my wife’s education but she ended up not needing it since she used getunbound.org .

The way I see it we have a least 3 options:

1. Cash in the entire investment and pay off the mortgage.
2. Leave account alone and don’t pay off the mortgage.
3. Cash in part of the investment and pay off a portion of the mortgage.

Would you cash out the Fidelity investment and pay down (or off) the mortgage?

[Eagle]

Additionally to do:

A. Call Lender to find out monthly payment cost breakdown and payoff.
Done!
Principle – $205
Interest – $341
Extra Principle - $127
Tax – 270
Insurance - $111

Mortgage payoff if by July 5, 2017: $89,243.64

So we'd free up $672 a month.

B. Call Fidelity – to see penalty if any for cashing out the investment.

Done. Taxable Gains $17,349. As I understand it all we would have to do is pay taxes on the gains.

C. Call CPA – to see tax implications.
Called and left a message. Need to set up appointment.

[disneysteve]

How is the money invested at Fidelity? How has the investment been performing?

If you itemize your deductions, the mortgage is costing you about 3.5%. Is the investment account outperforming that?

You don't yet have a fully funded emergency fund. Six months worth of expenses would be $18,000 so if you do liquidate the investment, I'd use 5K to top off your EF.

You'd also need about $2,600 for capital gains tax.

Personally, I'm not a big fan of cashing out investments to pay down low interest debt but there's nothing inherently wrong with it. You lock in a set return on that money. You just sacrifice the opportunity to earn a higher return through the investment.

[creditcardfree]

What is the plan for college for your children? It seems that would be coming due in about the same time as you would pay off the house as things currently stand.

What would you do with the $672 that you free up by paying off the mortgage?

[Jluke]

I would not pay it off with investments. You will be house poor.

I'd look at that investment account as a "gift" to allow for additional compounding.

(89,000/627 )/12 would take 11 years of saving that amount each and every month. You'll make so much more with very little effort if you don't deplete your taxable account.

Also, looking at the age of your vehicles, that may be an expense coming up.

ETA: I think you should move on from Ramsey. You can treat your taxable account as a 2nd tier EF.

[Petunia 100]

What is the purpose of the Vanguard Star - 1 and Vanguard Star - 2 accounts?

Are those taxable accounts? Vanguard Star is a fine fund, but it is tax inefficient.

[Eagle]

How is the money invested at Fidelity? How has the investment been performing?

If you itemize your deductions, the mortgage is costing you about 3.5%. Is the investment account outperforming that?

You don't yet have a fully funded emergency fund. Six months worth of expenses would be $18,000 so if you do liquidate the investment, I'd use 5K to top off your EF.

You'd also need about $2,600 for capital gains tax.

Personally, I'm not a big fan of cashing out investments to pay down low interest debt but there's nothing inherently wrong with it. You lock in a set return on that money. You just sacrifice the opportunity to earn a higher return through the investment.

Fidelity breakdown is as follows:

Domestic stock 70%
Foreign Stock 5%
Bonds 23%
Short-Term 2%

7/1/16 the account was worth 74,885. Today (7/20/17) it looks like it's worth about 87,538

Yeah I anticipate about $2500 for capital gains tax. I'm having lunch with my CPA guy this week.

I've considered keeping some of the money back to complete the emergency fund and save some for the taxes. Although we typically get back $3000-4000 for our income tax return so we're paying a little extra into taxes.

[Eagle]

What is the plan for college for your children? It seems that would be coming due in about the same time as you would pay off the house as things currently stand.

What would you do with the $672 that you free up by paying off the mortgage?

The Vanguard accounts is money theoretically set aside for their education. There's 13 and 15 years for the money to grow. However, it will remain in my name until they are older. There will be some stipulations for them to use that money.

We'd increase our savings account (emergency fund) and then start re-investing.

[Eagle]

I would not pay it off with investments. You will be house poor.

I'd look at that investment account as a "gift" to allow for additional compounding.

(89,000/627 )/12 would take 11 years of saving that amount each and every month. You'll make so much more with very little effort if you don't deplete your taxable account.

Also, looking at the age of your vehicles, that may be an expense coming up.

ETA: I think you should move on from Ramsey. You can treat your taxable account as a 2nd tier EF.

What if the market crashes again like it did in 2008? This bull economy or market can't last forever.

Yes it would take 11 years of savings to make up for that. It would also mean theoretically less stress. No mortgage means we can do more with what we have.

Yes, the age of the vehicles is a consideration.

[Jluke]

What if the market crashes again like it did in 2008? This bull economy or market can't last forever.

very unboglehead statement... your house could lose value and then you never see that liquidity either.

Yes it would take 11 years of savings to make up for that. It would also mean theoretically less stress. No mortgage means we can do more with what we have.

that contradicts... if you deplete your taxable savings, now you have to replenish it with your former mortgage payment. Also, then you should be trying to max out your 401k. So poof - that $672 really doesn't go too far.

Remember, I did payoff my mortgage last year. I would beef up your liquidity before paying it off.

Is the house in good shape - HVAC, roof, flooring, etc?

Lots of things to consider before killing a monthly payment that is low.

And, eventually 2 car payments could very easily exceed your mortgage payment.

I think you should focus your attention elsewhere on your finances.

[snafu]

What is driving your desire to pay off your mortgage?

[creditcardfree]

In my opinion, retirement is the key. It's the one thing you can't borrow for. You are on track saving 17% of your gross...it seems you could bump that up if you change your withholding and avoid getting a tax refund every year. So you are set on Baby Step 4 for the most part. Not wrong to save more than you already are.

Step 5 is saving for the kids college. I'd say you have a very strong start. Those funds will grow a lot in 13 years+.

Step 6 is paying off the mortgage early. It would not be wrong to use some of the Fidelity money towards this, but I would not use it all only to have to start over on saving for college. We have a daughter in college right now, with some of the money saved. If it were me, I would figure out when I want the mortgage paid off by. Maybe the year your oldest child graduates or 10 years from now?! Clearly you want it sooner than the current 16 year expected time frame. Run calculations to figure out how you can make that happen. The beauty of paying the mortgage off on your own schedule is that you can stop paying extra at any time to fund home repairs, and braces for the kids, ect.

It is of course your choice! It's just so nice that you have a great start on retirement and college. Being uncomfortable with the mortgage means you are probably very motivated to pay it off. Why not try pay it off while keeping what you have accomplished this far intact?

[MonkeyMama]

What if the market crashes again like it did in 2008? This bull economy or market can't last forever.

I think this is a valid consideration. Statistically, you will fare better in the market. But I don't think it's the worst thing to sell when ahead. How would you feel if you decided to wait a year or two for some more liquidity, and then the market tanked and took a long time to recover?

In your case, I could probably flip a coin. That said, supporting a family myself, I wouldn't feel comfortable with so little cash left over. I'd maybe sell the investments and pay down to the point you have $20k cash, or something like that. This may vary based on your feelings on job security. But we've always had a debt-free lifestyle (re: non-mortgage debt) and that requires more cash on hand than if you are fine with charging big expenses. Supporting a family, 6-months of income (in cash) is probably more my minimum comfort level.

Liquidity aside, you are in a strong financial position. I don't feel that you can go wrong either way. (I could flip a coin because you probably can build up liquidity very quickly again, so am not overly concerned on that point).

[MonkeyMama]

Yeah I anticipate about $2500 for capital gains tax. I'm having lunch with my CPA guy this week.

It sounds like you would probably pay 0% capital gains tax with IRS. At your income level, long-term capital gains are tax-free. Definitely good to discuss with your accountant. (& state taxes may differ).

If you are expecting an income increase down the road, I would consider harvesting tax-free gains. (This is if you decide not to sell your investments now). Just ask your accountant about that. You could sell and re-buy the same funds immediately. This would just lock in those gains as tax-free while income is low enough and before any future tax law changes.

[Eagle]

very unboglehead statement... your house could lose value and then you never see that liquidity either.



that contradicts... if you deplete your taxable savings, now you have to replenish it with your former mortgage payment. Also, then you should be trying to max out your 401k. So poof - that $672 really doesn't go too far.

Remember, I did payoff my mortgage last year. I would beef up your liquidity before paying it off.

Is the house in good shape - HVAC, roof, flooring, etc?

Lots of things to consider before killing a monthly payment that is low.

And, eventually 2 car payments could very easily exceed your mortgage payment.

I think you should focus your attention elsewhere on your finances.

Lol, this is true about housing loosing value. However, the house could loose value and we could still be stuck with a $1050 payment a month. Welcome to 2008 all over again.

Flooring is good. AC Unit probably will need to be replaced in the next 5-10 years. Roof is a 30 year roof and we're on year 17. Roofing guys were very disappointed when inspecting our roof when we the city/neighborhood had hail damage. The fence may need to be replaced in the next 5-10 years. We recently replaced the water heater. So I think we're good for a few years on those expenses.

We will not have 2 car payments ever again. We never even had 2 car payments. Just one and don't want to go back.

The Honda Civic only has like 85,000 miles. Chances are it will last well into 200,000 miles.

The Toyota Sienna (165,000 miles or so?) eventually will need to be replaced. However, we can always use one vehicle until we have enough to pay cash for another $6000-10000 vehicle.

I see your point about maxing out retirement accounts. I think that will only happen once the next promotion occurs or my wife goes back to work.