I'm 40, single, with a 16-year-old going to college soon (not really relevant I guess but that’s a picture of my life). I bought a house 10 months ago for $455k with 7% interest rate, and it has $116k left on the mortgage. I have no other debt.
I plan to keep this house forever because it’s near my business and my family, though I have a near-term goal of buying/renting a condo in NYC and splitting my time.
I’m self-employed and do not have any 401k/IRA/stocks/investments etc (just never figured it out, I know that’s bad). I currently have $220k in a 3.5% savings account and $20k cash for emergencies.
Should I use the funds in my savings account to pay off my mortgage? I hate having debt and I hate paying the monthly mortgage when I know I could just wipe that payment off my list. I’m paying about 5k/month toward my mortgage right now. I’d rather save that money to put it toward my goal of getting a second place.
I know that investments *can* pay off more, but given that I have pretty much no experience with investing, my gut says to pay off the mortgage to get basically the tax-free 7% return on the interest, and THEN tackle the next life challenge of learning to invest. Do you think this is wise? What should I do?
I could pay off my 7% interest rate mortgage…should I????
byu/Character-Scale-7549 inpersonalfinance
Posted by Character-Scale-7549
19 Comments
At 7% I would pay it off before investing. Regarding your $220k in a savings account, you should really have most or all of that invested. The general rule of thumb is to keep 3-6 months of expenses in a HYSA and then invest the rest.
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The answer is based on the total of your finances and goals.
Pay off the mortgage, set aside 3-6 months of living expenses – leave this in your 3.5% savings account, then invest the balance (S&P500 is what I’d invest in).
Going forward, you can invest the amount you would have otherwise paid towards your mortgage monthly. That’s what I would have done if in your shoes
Your gut is right. Pay off the mortgage, keep ~$50k liquid, and start putting that freed-up $5k/month into a SEP-IRA or Solo 401k since you’re self-employed. Free tax savings you’re leaving on the table if not.
NYC place gets way easier to fund once that mortgage payment is gone.
yes pay it off, 7% guaranteed tax-free return beats any savings account
Why not look for a low / no cost refinance?
If the interest rate is higher on the debt then what you would earn from letting it sit; i’d say go for it. Remember to set aside some extra for property taxes.
There is a huge degree of relief when you never have to think about a mortgage payment again, and you’ll have more cash available for investing each month going forward.
Yeah, 7% risk free is great way of using your money.
After you pay it off. Open a brokerage account with Fidelity or whoever you prefer. Just invest into a mutual fund or etf that follows the s&p500 like fxaix.
Maybe start a Roth IRA (retirement) as well and max it out for this year. Again choose an etf/mutual fund to invest in.
As others have said pay off the mortgage. What’s your gross income from consulting work. You need open up a SEP IRA to reduce your taxable income. Can’t believe an accountant has never mentioned this to you
You have paid about 300K towards this mortgage in the last 10 months? Or have you owned this house for 10 years?
You probably could pay it off and still have some money left over. Just a few questions to consider:
Do you have health insurance? If not you could find yourself with a big bill someday.
Will you need any of the money for your daughter’s tuition or to help her later on? Hopefully you keep business funds separate from personal funds. If you do is the business fully funded?
What you are losing is liquidity. Granted an emergency fund is a ballpark figure. If you were no longer able to work or temporarily unable to work do you have insurance to cover the possibility of no longer being able to be self-employed? This is important since you are self-employed.
Pay off the mortgage and shift half of the remaining into a Solo IRA. Your high yield saving account is good actually but the Solo IRA is better.
Just go to a local bank branch and ask the manager how to set one up. It’s pretty easy to let them set it up. You will save a lot of money on your taxes, but contributing to it because you get the employer and employee write-off as self employed. Close to 80% of what you save, should go into the Solo IRA. You can borrow the lessor of up to half or $50k from the IRA and use as a down payment on the condo (or just about anything). That way, you’re paying back more to your own retirement account.
Want to save more money? Structure your business as an LLC and pay taxes like an S-Corp. That way you can more easily file your business expenses like you and your child’s health insurance, your short and longterm disability insurance, basic life insurance. These might not be benefits you have but they will protect you and your child’s future, and are business expenses that you can use if you have an LLC. There are companies who can help you for a fee up front and you can work with an insurance broker to design a basic plan for you.
Pay it off and use the remainder for retirement.
You can have that place in NYC when your retirement account(s) hit $2MM.
If I could get a guaranteed 7% on my money I would take that any day, all day.
Consider the federal tax break you get for interest accrued on mortgage <$750,000. You may get more interest accrued from investing than you lose from mortgage interest because of this break.
However there is certainly something to be said about the freedom of having no debt both mentally and financial risk-wise.
I’d pay it off probably but anyway that’s something to consider
This isn’t advice but things to consider.
The first question to ask yourself is, can you earn more than 7%?
Historically the answer is yes, long term in the market. That said a guaranteed 7% (paying off that debt) is nothing to sneeze that, which is what you’d be giving yourself to pay it off. But investing that money could mean more for you in the long run than paying off the debt.
The other thing is, you could definitely look to refinance your mortgage lower, and then the hurdle is lower to earn more on that money.
The other thing is depending on how much you have for deductions, you do get a tax benefit by carrying a mortgage and being able to deduct the interest
200,000 offers you a lot of earning power when it’s invested, so while it will offer peace of mind, and allow you to save money monthly – having a lump sum like that isn’t something that you may get as an opportunity again anytime soon.
To be clear, I am not advising you about all of your money in the stock market, this is a very personal decision for you but the financials might make sense for you to keep carrying the debt and invest and try to earn the difference over the long run.
If anything meet with an adviser (fee-only) and see if it makes sense for you.
How anyone can read the posts about job loss, disability, death of a spouse, etc. and still want to not pay off the house is beyond me. Future income/health is not guaranteed. I’d rather worry about real estate taxes and utility bills than house payments if the worst should happen.