WWYD? Cash in Investment to Pay Off Mortgage Question

[Eagle]

What is driving your desire to pay off your mortgage?

We want to be debt free. We're tired of the mortgage payment. I think psychologically it will help us to feel free.

What drives anyone to pay off their mortgage?

[Eagle]

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?

Yes you can't borrow your way into retirement

We don't plan on touching the kids college funds.

I guess we could pay off a portion of the mortgage to satisfy some of the bug or craving for finishing up the mortgage. Yeah, that's a good point about paying the mortgage ahead on our own schedule.

[Eagle]

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).

Yes, 6 months of emergency fund would be better. Beefing up the emergency fund might be the course of action we follow if we do cash this investment out.

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.

That's a good idea about harvesting tax-free gains. Selling and re-buying the same funds would lock in the gains before the increase in income in the next 18-24 months.

[LivingAlmostLarge]

When is your wife realistically going back to work with a 3rd on the way?

Are you maxing out your roth iras? It doesn't appear so and at your bracket you should be. I think 15% of your money to retirement is good. I think that it should be directed to 401k match then Roth IRA.

I'd also divert 5% of income to savings for long term stuff maybe even 10%. It gives a nice build for home repairs, car replacement etc. This could be invested.

I would also lock in the capital gains on the taxable account. I'd also use it to fund the Roth IRAs if you can't get the cash in time for this year.

Now at $6k how old are your kids? Depending on their ages it could be behind. With the cost of college and I wonder how much 13 years will really return your investments. I say that as someone saving for college and looking at what we have and our returns I am concerned. Also you have 3rd on the way and I assume you want to pay for that one's college? How will that college savings affect the budget? How much are you saving annually for college each kid? Is the goal to pay 100%?

I would probably lock in the gains and consider beefing up the EF using half to pay off the house and leaving the rest invested. Possibly taking $11k for Roth IRA.

With the next promotion sure pay off the house. Cash in the taxable account if you don't need a new minivan and then pay off the house. Why not? I see it as peace of mind.

[MonkeyMama]

Are you maxing out your roth iras? It doesn't appear so and at your bracket you should be. I think 15% of your money to retirement is good. I think that it should be directed to 401k match then Roth IRA.

This reminds me. I always say that I wouldn't put a penny in taxable investments unless ROTH IRAs (self and spouse) were maxed out. Take advantage of the tax shelter. The reason is because ROTH IRAs are easy to tap before retirement. Well that, and because ROTHs are incredible tax shelters that you should take advantage of. For any money you aren't 100% sure if you will need in the next 25 years, just put it in the ROTH. (Of course if you are saving up for something very specific or know that you will need the money, taxable investments would be more sensible. But in our 20s and 30s there's a lot of long-term unknowns).

Another topic to discuss with your accountant.

[AnnieG]

There is lots of good advice here.

From the perspective of someone who did decide to pay off a mortgage...

We paid off our previous mortgage during the early years of the last recession, because we wanted to feel safe - unlike all of those folks losing their homes. We cut back our spending to a minimum and put everything extra into the mortgage (without reducing 401k or Roth contributions).

In 2014, my husband's job moved about an hours drive away. We decided to move closer rather than lose all that time together. Houses here are about twice the cost of our old town, so we ended up with a new mortgage (starting June 2015). Even though we can afford the payment, we found that we hated the way we felt no longer owning our home. So, at the end of 2016 and beginning of 2017, we sold stock from our taxable account to get the principal down. Now, we will have the house paid off by the end of this year.

In neither case have I regretted our decision. Sure there are cons (loss of growth, risk of house going down in value), but, for us, the positives win.

[~bs]

I wouldn't do it unless you had an adequate EF and some other savings in place.

I also wouldn't do it unless the mortgage was paid off in full unless you're trying to shorten the term of the mortgage (and get a better interest rate) and putting some cash down to keep your monthly payments the same. Dumping your entire savings into a mortgage that you're still paying on is a bad idea in the event of job loss or other hardships.

If you have those things covered, then maybe consider paying off a mortgage.

[siggy_freud]

I agree with what people are saying about keeping some liquidity available for an emergency. That aside, I've always been a fan of paying down debt where possible.

Yes, you can often get a better return playing the market, but there is risk in that. Over the long haul people do make money. But it's all about timing. For some who lost a lot of value in 2008, they simply couldn't afford to wait the 5-10 years for things to bounce back for retirement.

If I had the cash, and other higher interest debt was paid off, I'd pay off my house too. I think I'd get a lot of peace of mind being young with a paid off house .

[scfr]

It will be interesting to hear what your CPA has to say.

One thing to think about is how much of your net worth you want to have in non-financial assets. If you were to cash out the Fidelity fund and pay down the mortgage you'd have a bit over 50% of your net worth in non-financial assets (house & cars). Is that something you'd be comfortable with?

FWIW, we paid off our mortgage early and never regretted it. (We were about 5 years older than you & your wife are now.)