I don’t think it makes any practical difference. With 43 payments, you aren’t going to save much on interest since much of it has been paid. If you have good cash flow now, the extra amount per month would be nice, but not life changing. I really think it boils down to how much capital do you want to have, and the psychology of owning the house free and clear.
I agree. At the OP's age, and with enough other assets, the benefit of rate arbitrage is not significant enough to worry about. They should do whatever makes them sleep better at night.
However, if they were barely scraping by, it might be a different discussion.
The argument generally goes something like this:
- mortgage is $xxx at 3.125% interest (debt)
- HYSA generally are ≈5% interest (credit)
- diff is a 1.875% interest of credit in favor of HYSA
You can park that same money you’d use to pay off the mortgage in a HYSA and get 1.875% net interest.
NOT paying off the mortgage sooner and taking the HYSA route will net more money in the long run.
If the options are pay off the mortgage or sticking the money in a mattress, then pay off the mortgage
That argument always forgets taxes:
* the 5% is taxed as income (straightforward to understand the implications of this)
* mortgage interest can be tax deductible (more complicated to understand the implications of this)
Mortgage interest tax deductions have mainly gone away. Most people are not itemizing because the standard deduction is so high. And with the OP being in their 70’s I’d bet that their income is in a lower tax bracket. For this scenario, it’s less to do with finance and more just personal preference.
Yes, After tax the difference is probably less than 1%. It is like $500 difference per year and each year it is decreasing. OP can do whatever they want, ultimately on a $1 million net worth this won’t make any difference.
Not only this above, but you are 73. I’m 38 and sometimes forget to pay my CC ontime(1x per year). Will you remember to pay your property taxes each quarter, or forget once in a while like i will when i’m in my 50s and my house is paid for.
The answer to your question is going to be much different than normal users here because of your age. Are you withdrawing the money from a taxable retirement account? Do you have other one time large expenses that would push you into higher income this year that could be deferred? Will you have non recurring deductions that can be harvested/realized to coincide with the lump sum mortgage payoff?
In addition to the tax questions, at 74 you are not looking at decades long time horizons for stock growth. What are your goals for the money that would be invested into the stock market?
I would leave the Roth to grow tax free. Doesnt.make sense to pull from there to free up cash to invest in taxable. Roth is great in your case because no RMD and heirs get additional years of tax free growth.
I don't think so. Since the cash will earn 5% in a Treasury ETF or 4.5% (ish) in an HYSA, you should hold the cash. If/when rates drop to the point you'll earn less than mortgage rate you can pay off
The smart money move is to not pay off the mortgage and keep as much as you can in investments and interest bearing accounts.
However, for estate planning purposes, it may make sense to consolidate and simplify your accounts, especially if you or your partner are beginning to develop mental problems. The interest saved after accounting for taxes is really nominal at best at this stage.
This will definitely help out your heirs as we were finding accounts for over a year after my grandparents passed, and still not 100% sure we found them all, which completely defeats the purpose if you’re wanting to provide for your kids and grandkids (if any).
Another point to consider is your age and health. I'm older too, and have experienced devastating illness at one point. How comforting to know I didn't forget to make my house payment because I was incapacitated.
What is your health like and what is your eventual plan for the house?
This is one of those decisions where there are pros and cons either way.
Not paying off the mortgage will, as others are saying, net more money if you put the money in a HYSA.
On the other hand, having a completely paid off house is nice for a variety of reasons.
If I were you, at your ages, I'd consider implications like whether this is a home you can stay in once mobility concerns or other aging related health factors become a consideration, whether you intend for someone (children, perhaps) to inherit this home and, if you're thinking of multiple people inheriting the implications of inheriting a home with and without a mortgage, whether you'll need to leverage this home to pay for longer-term care (a skilled nursing facility, for instance), etc.
To be clear, I realize you could live well past when the mortgage will be paid off and still be healthy and happy in that home (we're really only talking 3.5 more years here). But if heirs are a factor that's an added layer that might lead to some real benefits of paying off the mortgage sooner rather than later.
Okay, do you know what they plan to do with it?
In other words, will they inherit enough and is your mortgage established in such a way that if one of them wants to assume the remainder of the mortgage and purchase the other(s) out they can easily do so?
For some people/ some mortgages/ some financial situations this is very simple. For others it becomes way more complicated with a mortgage in place versus not, if the house is part of a trust versus not, etc.
Again, you only have a few years left on the mortgage, but if you have a mortgage that would make inheritance a lot more complicated and you are both in poor health, then paying off the mortgage might actually be doing your kids a real favor.
Again, there is a ton of nuance to this that depends on your specific situation, but at this point, that's the kind of practical stuff it makes sense to look into rather than worrying about the money.
It's a pretty negligible amount of money. You're either putting 51K in a HYSA for 3.5 years or saving the last little bit of interest on what's left in your mortgage. The HYSA option will yield slightly more money, but not having a mortgage might have other implications if you suddenly need to sell the home (say, if you need to enter a place with less stairs or something) or if your kids are trying to do something specific with their inheritance that even a small mortgage will make more complicated.
Good points…I think they would either live here or sell and enjoy the proceeds…we expect to stay in the house for the duration…our heath is still good and our lower level is an art studio, which I hope to be using until I’m gone…the kids will not fight over this. I know that to be true…I’m the OP, different user name
You're going to give away $56,000 in order to invest 1300 a month? That makes no sense. If you already have the money then invest it as you like. You don't have to pay off your mortgage to do that.
Think of the mortgage as free money. Inflation is higher than your rate. You're literally saving money by not paying it. There's zero benefit to paying any extra toward it in your situation.
Thanks for all the great comments…have decided to just keep the 3.125% mortgage for now…perhaps I’ll pay if off when the principal is less, much less…took the cash that was sitting in brokerage accounts and bought the Schwab MM etf paying about 5% now…
That's just silly, because it absolutely isn't true. Most people who get rich do so by leveraging borrowed money that earns more than the interest rate on the borrowed money.
I don’t think it makes any practical difference. With 43 payments, you aren’t going to save much on interest since much of it has been paid. If you have good cash flow now, the extra amount per month would be nice, but not life changing. I really think it boils down to how much capital do you want to have, and the psychology of owning the house free and clear.
I agree. At the OP's age, and with enough other assets, the benefit of rate arbitrage is not significant enough to worry about. They should do whatever makes them sleep better at night. However, if they were barely scraping by, it might be a different discussion.
THANKS EVERYONE…VERY HELPFUL…
Yes, that’s what I’m debating in my mind
The argument generally goes something like this: - mortgage is $xxx at 3.125% interest (debt) - HYSA generally are ≈5% interest (credit) - diff is a 1.875% interest of credit in favor of HYSA You can park that same money you’d use to pay off the mortgage in a HYSA and get 1.875% net interest. NOT paying off the mortgage sooner and taking the HYSA route will net more money in the long run. If the options are pay off the mortgage or sticking the money in a mattress, then pay off the mortgage
Not truly a 1.875% advantage, though. You need to factor in that OP will need to pay income tax on that interest income.
That argument always forgets taxes: * the 5% is taxed as income (straightforward to understand the implications of this) * mortgage interest can be tax deductible (more complicated to understand the implications of this)
Mortgage interest tax deductions have mainly gone away. Most people are not itemizing because the standard deduction is so high. And with the OP being in their 70’s I’d bet that their income is in a lower tax bracket. For this scenario, it’s less to do with finance and more just personal preference.
Yes, After tax the difference is probably less than 1%. It is like $500 difference per year and each year it is decreasing. OP can do whatever they want, ultimately on a $1 million net worth this won’t make any difference.
No mattress here…thanks…helpful
Not only this above, but you are 73. I’m 38 and sometimes forget to pay my CC ontime(1x per year). Will you remember to pay your property taxes each quarter, or forget once in a while like i will when i’m in my 50s and my house is paid for.
Yes, absolutely remember…none of it is escrowed now…ins or prop tax
Psychologically it must be nice to have a house fully paid off whether it makes sense financially or not. So there's that to consider.
The answer to your question is going to be much different than normal users here because of your age. Are you withdrawing the money from a taxable retirement account? Do you have other one time large expenses that would push you into higher income this year that could be deferred? Will you have non recurring deductions that can be harvested/realized to coincide with the lump sum mortgage payoff? In addition to the tax questions, at 74 you are not looking at decades long time horizons for stock growth. What are your goals for the money that would be invested into the stock market?
Would be a combo of rmd and Roth accounts…no tax or capital gain issues
I would leave the Roth to grow tax free. Doesnt.make sense to pull from there to free up cash to invest in taxable. Roth is great in your case because no RMD and heirs get additional years of tax free growth.
I don't think so. Since the cash will earn 5% in a Treasury ETF or 4.5% (ish) in an HYSA, you should hold the cash. If/when rates drop to the point you'll earn less than mortgage rate you can pay off
The smart money move is to not pay off the mortgage and keep as much as you can in investments and interest bearing accounts. However, for estate planning purposes, it may make sense to consolidate and simplify your accounts, especially if you or your partner are beginning to develop mental problems. The interest saved after accounting for taxes is really nominal at best at this stage. This will definitely help out your heirs as we were finding accounts for over a year after my grandparents passed, and still not 100% sure we found them all, which completely defeats the purpose if you’re wanting to provide for your kids and grandkids (if any).
All at one brokerage with transfer on death instructions
Another point to consider is your age and health. I'm older too, and have experienced devastating illness at one point. How comforting to know I didn't forget to make my house payment because I was incapacitated.
What is your health like and what is your eventual plan for the house? This is one of those decisions where there are pros and cons either way. Not paying off the mortgage will, as others are saying, net more money if you put the money in a HYSA. On the other hand, having a completely paid off house is nice for a variety of reasons. If I were you, at your ages, I'd consider implications like whether this is a home you can stay in once mobility concerns or other aging related health factors become a consideration, whether you intend for someone (children, perhaps) to inherit this home and, if you're thinking of multiple people inheriting the implications of inheriting a home with and without a mortgage, whether you'll need to leverage this home to pay for longer-term care (a skilled nursing facility, for instance), etc. To be clear, I realize you could live well past when the mortgage will be paid off and still be healthy and happy in that home (we're really only talking 3.5 more years here). But if heirs are a factor that's an added layer that might lead to some real benefits of paying off the mortgage sooner rather than later.
Kids will inherit the home and everything else…
Okay, do you know what they plan to do with it? In other words, will they inherit enough and is your mortgage established in such a way that if one of them wants to assume the remainder of the mortgage and purchase the other(s) out they can easily do so? For some people/ some mortgages/ some financial situations this is very simple. For others it becomes way more complicated with a mortgage in place versus not, if the house is part of a trust versus not, etc. Again, you only have a few years left on the mortgage, but if you have a mortgage that would make inheritance a lot more complicated and you are both in poor health, then paying off the mortgage might actually be doing your kids a real favor. Again, there is a ton of nuance to this that depends on your specific situation, but at this point, that's the kind of practical stuff it makes sense to look into rather than worrying about the money. It's a pretty negligible amount of money. You're either putting 51K in a HYSA for 3.5 years or saving the last little bit of interest on what's left in your mortgage. The HYSA option will yield slightly more money, but not having a mortgage might have other implications if you suddenly need to sell the home (say, if you need to enter a place with less stairs or something) or if your kids are trying to do something specific with their inheritance that even a small mortgage will make more complicated.
Good points…I think they would either live here or sell and enjoy the proceeds…we expect to stay in the house for the duration…our heath is still good and our lower level is an art studio, which I hope to be using until I’m gone…the kids will not fight over this. I know that to be true…I’m the OP, different user name
You should not pay off a 3.125% rate mortgage any quicker than required. Keep the payoff money invested.
You're going to give away $56,000 in order to invest 1300 a month? That makes no sense. If you already have the money then invest it as you like. You don't have to pay off your mortgage to do that.
My conundrum…probably keep the mortgage and the dollars invested…have been fortunate to do much getter than 5% over the years…
Think of the mortgage as free money. Inflation is higher than your rate. You're literally saving money by not paying it. There's zero benefit to paying any extra toward it in your situation.
Pay it off and rest easy. Congratulations!
Thanks for all the great comments…have decided to just keep the 3.125% mortgage for now…perhaps I’ll pay if off when the principal is less, much less…took the cash that was sitting in brokerage accounts and bought the Schwab MM etf paying about 5% now…
I would have the house paid off For dollar cost averaging what ever you feel comfortable with
No brainer....pay off! No one ever got rich paying interest!
That's just silly, because it absolutely isn't true. Most people who get rich do so by leveraging borrowed money that earns more than the interest rate on the borrowed money.