[USER]

Mortgage payoff question:
My spouse and I have been contemplating whether we should pay off our mortgage with our taxable brokerage account.

We both currently work full time as engineers but are considering one of us staying home with our two young kids in about a year.

Our mortgage has ~200k remaining @6.75% interest with ~$2,800/month payment.

(Our original mortgage was about double that but we made a large payment with the equity from our previous house once it sold).

We have ~$330k in a joint taxable brokerage account and ~$800k in retirement accounts (401ks, Roth IRAs, and HSAs).

All accounts are in low cost broad based index funds.
We will not touch the retirement accounts but are considering pulling from the normal brokerage account to pay off the mortgage.

We’re considering this so that our monthly expenses are drastically reduced for if we go down to one income.

In the long run we would also like to have the mortgage paid off before we officially FIRE as well. And peace of mind of having a paid off house would be nice too.

We’d have to pay the 15% long term capital gains tax on that money but what else should we be considering before we make a decision?

Some clarifications: about 25-30% of the brokerage amount would be subject to long term taxable gains tax.

Also we both make about the same amount and either one of our incomes individually would still put us above the 0% tax bracket for gains.

We have checked with our bank and because we got an arm, we are not able to recast the existing mortgage to lower our monthly payment.

We also are currently maxing out all retirement accounts (401k, backdoor Roth IRA, HSA).

After that, paying for two kids in daycare and our mortgage, there isn’t a lot of extra cash flow to pay extra.

[Brian]

Oh, another option is to recast your mortgage. Pay down 100k and reset the amortization. Will drastically reduce the payment.

And you still have 100g extra in your account to have in case of job loss or whatever.

[Dave]

What would the plan be for the $2,800/month in new cash flow?
Are there some tranches of investments with higher basis that you could sell to minimize taxable capital gains?

How much need for larger sums of readily accessible cash do you foresee?

Once you’ve paid off the mortgage, it’ll be more difficult (but far from impossible) to tap into your newfound equity.

[Kim]

Is the brokerage in a joint account? What happens if there’s a divorce? Is home inn both names?

[Brian]

The main thing to consider is the interest vs rate of return in the market.

You would free up cash flow but also take a massive hit to savings, which would cover that cash flow if you pulled out each month.

It’s kind of 6 vs half a dozen.

You are moving liquid money into an illiquid asset. That’s the main concern. What if you both lost jobs?

That 300k would ride you out for a long while. If you pay off the house, you don’t have that beefy backup.

That said, 130k left over is still a lot. So, then it comes down to interest vs gains again.

Personally, I’d pay it off. Guaranteed 6.75% is a good return.

[Noa]

Are you still contributing to your investments? If so, you could stop contributing and put these funds towards paying off principal and avoid/delay capital gains taxes

[Karen]

Here’s my 2 cents. I would leave the brokerage alone. Given that you’ve already paid a large amount of principal down, you’ve likely already greatly reduced your monthly interest as mortgage interest is front loaded.

Take one of your incomes and live on that and use the other income (the one you would give up in the future) and put that full amount toward the mortgage.

This will accelerate your payoff and get you used to living on the one income.

[Kevin]

Loan interest is paid with after tax dollars. Consider that you have to earn something like 40% more gross income to pay the interest out of net income.

So, killing a 6.75 % interest rate debt is financially even more beneficial than you might think…especially if you can then put more into your pretax savings buckets.

[Kimi]

It took my husband and I 5 years to pay off $347k mortgage at 3.65%. Instead of taking from brokerage accounts we used all bonuses and vested stocks to slowly chip away at it.

We prolly could’ve made more investing that money but it freed up cash flow monthly to be able to do something that was best for our family instead.

No regrets

[Mark]

There’s much to be said about owning your home outright. And dropping down to 1 income allows you to build social equity which I find to be at least as important as saving more $.

One person home to manage things could be just the stress reducer you need for your family.

[Kevin]

Just pay it off. If you think you just can’t live without a loan, go get another one.

You won’t though. I am very confident of that.

[Carrie]

You’ve got some good responses addressing the math.
I would like to offer that the peace of mind that owning your home outright cannot be quantified.

Will the economy crash and the sky fall like the increasing cacophony of voices are predicting?

Probably not.

But you can’t put a number on knowing that no matter what happens, your home is secure.

[Tim]

What about pulling from the $330k account as required to cover the income deficit if you go to 1 income?

Use the interest made in the brokerage account to cover the payment and you don’t “lose” the cash.

[Tre]

Since you still have another year left, how much cash flow can you set aside for the house repayment during that time?
Everyone hates these but it’s also a consideration for you to look at rules for 401k loan.

Some plans allow you to keep a 5 year payback even if your employment is terminated. Or even if not, you have a lot of assets to cover a repayment, but opens you up market risk if you have to sell low).

It is up to $50k – the benefit here is that you are paying the interest to yourself versus the interest to the bank, you can avoid the capital gains tax from the taxable sale, and based on your short repayment terms stated in another comment, this may push out your repayment.

It doesn’t however completely solve your cash flow consideration.

You can also withdraw Roth IRA -contributions- at any time tax free. You may not want to do because of the long term tax advantages from a Roth.

Do you know what your tax basis is in your taxable to cover $200k? If it’s like 70% subject to capital gains v 30% that makes a big difference.

If it was like 50% I might just sell $200k minus your expected cash flow to repay debt in full by next year when you are on one income.

FWIW there were various factors in my decision but I sold $390k last month from my $700k taxable and Recast at $140k (6.625% rate). I know that’s not an option for you.

I expect to be able to pay it off in around 2 years. In hindsight I would’ve taken out a 401k loan if I had the 5 year repayment not tied to employment, to avoid some capital gains taxes and since my cash flow concerns aren’t until 4 years out.

I might still look into though to make a bigger recast payment to reduce my interest to the lender.

[Miranda]

Things to consider: if you pay it off, loss of liquidity, loss of mortgage interest deduction, certainty of not paying 6.75 percent on that 200k (somewhat equivalent to guaranteed 6.75 percent earned on this money).

[Kara]

Mortgage payoffs are often an emotional issue, rather than a financial one. Let’s acknowledge that up front.

It might not make the best financial sense and you might still choose to do it for legitimate emotional reasons.

That’s OK! Also, staying home with kids should be a family issue and not a financial one. I quit my lucrative job and stayed home with my kids, so I 100% think you should do that if you want to!

But also, acknowledge that it might not make financial sense, so when you ask for a financial analysis, you might not get the response you want from us.

For example, I don’t think it makes financial sense for most people to turn liquid assets (stock) into illiquid assets (house you don’t intend to sell).

I would also absolutely not sell stock and pay the capital gains tax hit to pay off my house. That makes your house pay off even more expensive!

If you really want the house paid off soon, I would consider using a lot of my monthly savings for the next year to pay towards my mortgage principal and see if I could get it paid off faster.

Also, when you focus on mortgage payments, you are focusing on a cash flow issue, not a wealth management issue.

What I mean is, if the $2800 monthly payment is really scaring you right now, can you save diligently for the next several months, pay down more of the principal and then refinance into a smaller monthly payment that you can manage on one salary?

Remember, you can deduct your mortgage interest payments from your income for tax purposes (another financial reason to not pay off your mortgage)–another financial reason to keep the mortgage.

From an wealth management perspective–to keep your options and opportunities as open as possible for the future–you are much better off having liquidity (keeping the stock) AND a mortgage payment.

That doesn’t mean you *should* do anything I suggest. You should make the decisions that are best for you and your family.

(I’m FIRE and still have an interest-only mortgage because it makes better financial sense for me.

Do I still get an urge to pay if off every once in a while? Yes! But I resist, because wealth management is a higher priority for me than cash flow.)

[Sarah]

Can you just pull 2800 month from it so it is still in the market? Seems like it would cover your mortgage while benefit, long term, from investing.

Might sell some stocks at a loss so help tax wise as well….

[Jenny]

If you are set on paying off the mortgage, consider doing it over 2 or 3 years. So, you don’t get hit over a big capital gains tax in one year.

For example 12/2025, then 1/2026, then 2027.

That’s another big bill that would trigger another need to reduce the liquidity you have on hand.

Or wait to sell until you have 1 income over 2 or 3 years for to reduce the capital gains taxes.

[Erin]

What is the basis of the amount you would pull out of brokerage? Basically, how much of it are you having to pay capital gains on?

[Angela]

Can you get down to the 0% capital gains bracket when you are on one income?

I’d try to time your sale of assets for the end of the first year on one income/ beginning of the second to minimize the taxes if you can.

[Author]

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