Pay off mortgage or invest extra funds

[hightower]

I was thinking of making extra payments on my mortgage now that all my high interest rate student loans are gone, but I changed my mind when I saw the tax savings this year and considered what my actual interest rate is on that loan.

I have a 296k mortgage on a 600k house and its at 4% 30 yr fixed, since I'm in a marginal tax bracket of 33% my actual interest rate is around 2.5% after tax savings, according to a couple of calculators I found online

I have 103k in student loans at 2.6 fixed%

 

I now feel confident that there is no reason to pay these down quickly and I am instead planning on saving aggressively and building up a large taxable account (of course after filling up tax advantaged accounts).

For me, seeing that my retirement and brokerage account balances are way bigger than my debt is what's going to finally feel like I've accomplished something.  My current net worth is largely dependent on the equity in my home.

[DMFA]

If you're purely looking at the math alone from what the money could be doing for you over time, it's better to leverage the low-rate, tax-deductible, simple interest of a mortgage against the higher-rate compounding (expected) gain of investments instead of paying it off. This is magnified by inflation; after tax deduction and assuming about 2% inflation (slightly less than historical average), many mortgage loans end up around nearly zero

However, if there are other things to be concerned about, like being near retirement and wanting/needing to eliminate debts, then it's never completely *wrong* to eliminate debts.  The math just supports leveraging it.

[Sneezy]

It is frustrating to me that mortgages are so inflexible (e.g. have to make the same payment every month).  Imagine if a mortgage was more like a HELOC and you could have your emergency fund and savings credited against the mortgage balance but be able to take them out (and increase the mortgage) as needed

More flexible products are apparently available in Europe but haven't gained traction in the US

http://www.investopedia.com/articles/mortgages-real-estate/08/offset-mortgage.asp

https://www.mtgprofessor.com/A%20-%20Early%20Payoff/the_cmg_plan_using_your_mortgage_as_a_checking_acc ount.htm

I don't see OP's plan as being very helpful as it is hard/impossible to obtain a HELOC at a lower rate of interest than one's mortgage.  I could see this being a more viable strategy as you got to the last few years as the mortgage balance went down.

I do agree with Zaphod et al. that at current mortgage rates most docs are better off investing the difference.  That said, when you are doing either one of these you are already in pretty great shape

[TheHappyPhilosopher]

I have a mortgage I could pay off tomorrow at around 3%, but I plan on keeping it at least until I retire. At retirement I may pay it off to lower my annual expenditures depending on federal and state tax brackets and the status of MAGI based health insurance subsidies.  At it's core though, a mortgage is a leveraged bet on inflation. If you think inflation is coming keep the mortgage, if you think we are going to become the next Japan then pay it off. My crystal ball is not working well right now. Here are some additional things to consider:

 

1. If your state has strong homestead asset protection laws this may tip you towards paying it down.

2. Consider paying it down completely when you retire for maximum flexibility (you don't lock up equity in a semi-liquid asset).

3. As stated above paying off mortgage in retirement may make sense from a tax liability and health insurance subsidy standpoint (especially if your spending needs are modest).

4. At the end of the day this decision probably matters very little, just do what simplifies your life and lets you sleep better at night.