Investment strategy for early mortgage payoff fund

[cubsbank]

Good morning WCI forum. First post so be gentle . I recently refinanced my mortgage from a 30 year fixed @ 3.75% to a 15 year fixed @ 2.75%. This pathway has me paying off my mortgage as my youngest is leaving for college. For the past 2 years I have been putting extra money away in a brokerage account which is earmarked for "early mortgage payoff". The obvious question is why don't I just put that money directly towards my principle. My answer to that is two-fold. One, while it is earmarked for mortgage, it is also an additional potential source to make up any shortcomings for college savings for my kids. Or, if things go the right way, could lead to a down payment on a future second home depending on life circumstances.

With that disclaimer I have a question about the asset allocation in this space. Right now I have it 100% in a S&P 500 index from Schwab. While this is not in line with my standard investment strategy which is a mix of stocks (US and international), Bonds and other, I am inclined to keep it 100% stock. The reason is that I am not depending on this money and can tolerate the ebb and flow of the stock market. Basically, when it hits a number that matches my remaining mortgage balance I plan on cashing in and paying it off (after paying capital gains of course). Is this plan crazy? Should I also diversify this account? Should I diversity like my standard retirement accounts but have a more aggressive lean (higher % in stock)?

Some details is that I have about $350K in principle with a rate @ 2.75%. Currently I put $500/pay period into this account. This goes in after I have maxed out my tax deferred accounts and put in money to my taxable accounts so I am saving 20% of my gross.


Thanks ahead of time for thoughts.

[CordMcNally]

Is this plan crazy? No.

Should you diversify this account? Maybe. When do you expect to possibly need this money and how old are your kids?

If it were me I would probably just pay off the mortgage as scheduled and continue to plow money into my taxable account, however, my way isn't necessarily right and your way isn't necessarily wrong. I think either way is reasonable.

[cubsbank]

Thanks. My kids are 9 and 4. My projected savings will leave me about 20K short for the youngest.

[Peds]

accelerating that mortgage payment while paying CG taxes is not the correct move.

if its truly for college then you know you have a firm end date and should treat whatever portion as such.

[Larry Ragman]

Not crazy. People set all sorts of mental accounting tricks. You did not say, but if you are doing this instead of 529 accounts for the kids’ college accounts then that is a mistake. As for 100% stocks, as long as you are comfortable the only real issue is timing. Whether for college or a payoff date for the mortgage, you should pull it out of the market ~3 years before you need it. Perhaps consider pulling it over several years to minimize tax implications.

[cubsbank]

Thanks to all. . I already maximize my 529s. Good advice on all regarding tax implications.

[FIREshrink]

Thanks to all. . I already maximize my 529s. Good advice on all regarding tax implications.

what does that mean, “maximize” your 529s? Especially when your projections have you $20k short of meeting your college funding goals. That doesn’t sound like maximizing.

[cubsbank]

Sorry, I have put the max into my 529s.

[G]

I'll just add to the chorus. I had a fund ear-marked for paying off the mortgage, but couldn't swallow the 23.8% penalty on the gains. So I just paid off the mortgage with new money and am left with a big fund that looks kinda awkward compared to its compatriots.

And to be clear, maxing 529s is 15k/yr, x 2 if married, and you can frontload that with 5 years of contributions.

[hightower]

I too have a plan similar to yours. We just refinanced to a 30 yr at 2.87%. Part of me wants to just attack the balance like I did student loans and see that debt go away quickly. But part of me would love to see my hard earned money go to work for me and potentially end up paying it off with a large amount of capital gains and dividends. The first scenario is more of a guarantee of course but has lower potential rewards (Probably one of the lowest 30 yr mortgage interest rates I’ll ever see in my lifetime). The second scenario has huge potential rewards but is offset by the potential for huge losses. As such, I plan on being very conservative with my taxable account for at least the time being. I currently only have like $65k in there and 23k is cash. Waiting for a potential buying opportunity if the market crashes again. I got a great deal on some Brk-B shares earlier in the year as part of it and the rest is a tax exempt bond fund. I personally don’t exactly feel great about the futures of this country and it’s economy so it’s hard for me to totally ignore that and go all out with investing in it with money that I may want to use to get rid of the mortgage. Maybe I’ll feel differently later on? Who knows.