Is it better to payoff mortgage or keep the money in stocks and cash ?
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apm2006
S Is it better to payoff mortgage or keep the money in stocks and cash ?
I have 137k in ARM mortgage which is presently at 4.375% will go up in August 2008. Presently I have $105 k in Vanguard Prime MM AC earning 5.14%. Also approximately $250 k in other stock funds. and 15 k in bank checking.
I am 40 years old, two small kids . both wife and I work in mid-range jobs and bring about 240k a year together. Don't have expensive hobbies, however do take vacations once a year and live under our means. Combined retirement accounts are over $600k. The assets listed above are non retirements accounts. Kids education accounts & special needs trust have over 50k
Answer:
I would not pay off a 4.375% mortgage. I suggest waiting until the rate goes up, and then pay it off. Some will suggest investing the money even then.but I've been in your position, and I can tell you that it feels wonderful to be completely debt free. And...as for the tax deduction..keep in mind that you will always get the standard deduction even if you have no others.
Again, I like paying off the mortgage...it is just not logical at the present low interest rate.
Congratulations on being a saver, and living below your means. Keep it up; you will enjoy life now...and even more so in retirement!
Hi APM,
I answered a similar question a while ago and asked for more info -- it looks like you've provided it.
You're in a pretty strong financial situation, so it's really just a decision about whether or not you would earn more money in an investment than you would save by paying of the mortgage.
The interest you pay on the mortgage is deductible, of course, and at $240k between you and your wife, you're talking about the 33% tax bracket. I presume your itemized deductions -- even without the interest -- is more than your standard deduction would be, so your tax refund would probably 40% when you figure in state taxes -- so the 4.375% you pay is actually only 60% of that after your tax return, or 2.625%.
How much money would you borrow at 2.625%? Personally, I'd borrow a billion dollars if I could, because I think I can make more than that in an investment. Even with a bond fund or something, you can make 6-8%, which would give you about 3.6-4.8% after taxes. Furthermore, if you put them into a tax-deferred retirement fund (fully-funding your 401k, if you aren't doing so already), then you effectively pay less in taxes by paying them later.
You're clearly already comfortable with stock funds, and those return 10-11% historically (and you only pay yearly taxes on a portion of that profit each year -- the dividends -- making the stocks partially tax-deferred themselves).
I'd just plow the $105k into your long term investments. Even if the interest rate jumps to 6.375%, that's still only 3.825% after your tax return -- and you can beat that in your investment portfolio.
All the US tax laws are set up to *benefit* the homeowner with a mortgage. Take advantage of them.
Doug
$15,000 in a checking account (earning nothing?) is probably excessive. If you were to pay down or pay off your mortgage, I would tap part of your checking account and then your MM account. I wouldn't touch the stock funds (and generate a tax liability). One strategy would be to make additional (principal only) payments before August 2008. That way your outstanding balance could be reduced to the point that the increased interest rate on your ARM would not have a big impact. It is probable that the new interest rate on your ARM will equal or exceed your MM rate of return. You might want to calculate your after-tax rate of return on your MMF and your after-tax cost of your ARM rate.
Since the mortgage is an ARM, you don't know what the interest rate is going to be long term. Short term, you could effectively "earn" 4.375% tax-free by paying it off.
Considering the fact that you will be paying taxes on the interest earned in your savings and dividends/capital gains from stocks, your "tax benefit" from deductible interest on the mortgage is pretty much a wash.
Pay off the mortgage and then take the monthly payments you would have been making and invest those as you see fit.
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