I really don't understand why you will not consider paying off the mortgage tomorrow, instead waiting until 2028. You have $135k approximately in the joint taxable account while the mortgage is only $70k.
With that low a mortgage principal, you are very likely taking standard deduction on your tax return. Or, you are paying 5.875% after tax interest rate on your mortgage. At your combined (Fed+State) marginal tax rate of 27%, that 5.875% rate is equivalent to finding a CD that is paying 5.875% ÷ (1 - 22% - 4.25%) = 8% approximately.
Based on the statements that if you pay $1000 extra every month you can pay it off by 2028, I think your current required mortgage payment is around $680 per month, and you have about 12 years to go before the mortgage is retired completely. But if you increase that payment to $1680 per month, the mortgage disappears by 2028 December
So, paying off the mortgage now is equivalent to finding a CD that pays you 8% for 6 years. If a bank were to offer you a 8% CD that is guaranteed for 6 years, with the only caveat being the offer is limited to a maximum of $70k principal, will you be tempted? I know I will be racing to that bank today, dropping everything else!!
[ As to why only 6 years and not 12, consider if you made an extra payment of principal that is exactly 1 month. Your payment schedule is now only 11 years 11 months more, not 12 years. Consider you paid two months of payment now, then the remaining payment schedule is only 11y+10m. As you increase the amount of prepayment the remaining mortgage duration drops from 12 years to 0 years, and the average is 6 years. Therefore a full payoff of the mortgage is equivalent to finding a CD with a lock in period of half the remaining mortgage term ]
Consider also this. You are investing in the BlackRock bond fund in your 401(k), and you have very nearly the same $130k there as is in your taxable. This fund, if I assume it to be yielding the same as the Vanguard Total Bond Fund, is yielding 4.16%. Net effect is that, you are borrowing $70k from your home at 8% APR, but turning around and lending that same money to others, accepting only 4.16% in return (both rates in pretax terns). Losing 4% per year, or $2800 per year. Why do you think that makes sense?
Sell the least appreciated shares of your joint taxable account, enough to realize $70k lumpsum. Use those proceeds to payoff the mortgage. Then turn around, sell $70k of your BlackRock bond fund, deploy that into your S&P 500 index fund within the 401(k). Your net exposure to stocks remains exactly the same, your net exposure to bonds remains exactly the same, so you are risk neutral both before and after the mortgage payoff. You simply exchanged a bunch of bonds yielding 4.16% in aggregate, to a SINGLE bond that yields 8% for 6 years, with no risk of default (the counterparty on that single bond is YOURSELF!)
Yes there will be a tax cost of LTCG to pay for liquidating the joint taxable account. But I suspect that will be tiny.
Edited to add: if 2.9% of $1.1 million portfolio, or $31k, is currently 5 months of expenses, your estimated monthly expenses are $6k per month. If the mortgage is paid off, your monthly mandatory expenses will decrease to $5300 odd, so the same $30k will almost become 6 months emergency fund, your intended target
Edited a second time to add: Her Rollover IRA seems to have about $50k in it. Since the Tax Cuts and Jobs Act expires at the end of 2025, consider Roth conversion of this money, half this year and half next year. Assuming that such Roth conversion won't vault you into the 24% bracket. Or perhaps even then, since at $1.1 million currently and adding $47k per year to the pot annually will very likely get you into 25% tax bracket in retirement. 22% tax or 24% tax now vs 25% tax later...
With that low a mortgage principal, you are very likely taking standard deduction on your tax return. Or, you are paying 5.875% after tax interest rate on your mortgage. At your combined (Fed+State) marginal tax rate of 27%, that 5.875% rate is equivalent to finding a CD that is paying 5.875% ÷ (1 - 22% - 4.25%) = 8% approximately.
Based on the statements that if you pay $1000 extra every month you can pay it off by 2028, I think your current required mortgage payment is around $680 per month, and you have about 12 years to go before the mortgage is retired completely. But if you increase that payment to $1680 per month, the mortgage disappears by 2028 December
So, paying off the mortgage now is equivalent to finding a CD that pays you 8% for 6 years. If a bank were to offer you a 8% CD that is guaranteed for 6 years, with the only caveat being the offer is limited to a maximum of $70k principal, will you be tempted? I know I will be racing to that bank today, dropping everything else!!
[ As to why only 6 years and not 12, consider if you made an extra payment of principal that is exactly 1 month. Your payment schedule is now only 11 years 11 months more, not 12 years. Consider you paid two months of payment now, then the remaining payment schedule is only 11y+10m. As you increase the amount of prepayment the remaining mortgage duration drops from 12 years to 0 years, and the average is 6 years. Therefore a full payoff of the mortgage is equivalent to finding a CD with a lock in period of half the remaining mortgage term ]
Consider also this. You are investing in the BlackRock bond fund in your 401(k), and you have very nearly the same $130k there as is in your taxable. This fund, if I assume it to be yielding the same as the Vanguard Total Bond Fund, is yielding 4.16%. Net effect is that, you are borrowing $70k from your home at 8% APR, but turning around and lending that same money to others, accepting only 4.16% in return (both rates in pretax terns). Losing 4% per year, or $2800 per year. Why do you think that makes sense?
Sell the least appreciated shares of your joint taxable account, enough to realize $70k lumpsum. Use those proceeds to payoff the mortgage. Then turn around, sell $70k of your BlackRock bond fund, deploy that into your S&P 500 index fund within the 401(k). Your net exposure to stocks remains exactly the same, your net exposure to bonds remains exactly the same, so you are risk neutral both before and after the mortgage payoff. You simply exchanged a bunch of bonds yielding 4.16% in aggregate, to a SINGLE bond that yields 8% for 6 years, with no risk of default (the counterparty on that single bond is YOURSELF!)
Yes there will be a tax cost of LTCG to pay for liquidating the joint taxable account. But I suspect that will be tiny.
Edited to add: if 2.9% of $1.1 million portfolio, or $31k, is currently 5 months of expenses, your estimated monthly expenses are $6k per month. If the mortgage is paid off, your monthly mandatory expenses will decrease to $5300 odd, so the same $30k will almost become 6 months emergency fund, your intended target
Edited a second time to add: Her Rollover IRA seems to have about $50k in it. Since the Tax Cuts and Jobs Act expires at the end of 2025, consider Roth conversion of this money, half this year and half next year. Assuming that such Roth conversion won't vault you into the 24% bracket. Or perhaps even then, since at $1.1 million currently and adding $47k per year to the pot annually will very likely get you into 25% tax bracket in retirement. 22% tax or 24% tax now vs 25% tax later...
Statistics: Posted by lakpr — Fri Nov 15, 2024 5:14 am