mortgage payoff plan with new Tax Code

[Seabass]

Forgive me if this was covered on forum previously.  New to forum following, website, WCI network and email newsletter fan for a while now

With the new tax code, if now taking standard deduction (increased to 24k per married couple), is it no longer "worth" or at least less palatable to carry a 3.5% mortgage?  I believe its a schedule A deduction.

Question will be to pay off 3.5% 30-yr mortgage vs 1.75% school loan first?

I realize the 1.75% payoff could even be debated as not doing at all, as not seemingly hard to beat that in market returns as posted about in a lot of places.  But I'm getting the itch to be debt free.

If mortgage was deductible interest, I was thinking of first disposing of school loans as it seems close to a wash.

If mortgage not being deducted because of higher standard deduction, paying mortgage first may make sense because at least that goes to an asset where the equity could be accessed in an urgent situation.

Thoughts?

 

 

[ruralpeds]

Some thoughts...
Numbers would be helpful. Any charitable contributions? Live in a state with SALT (you can still deduct 10k)?

One place I've listened through examples was this podcast...

http://doctorfreedompodcast.com/how-the-new-tax-packages-effects-you-part-3-married-physicians-with-200k-income/

Maybe help you?

Sorry, I'm no expert. Longtime reader, attending for 4 years so a few years learning.

[Peds]

Seabass wrote:

Forgive me if this was covered on forum previously.  New to forum following, website, WCI network and email newsletter fan for a while now

With the new tax code, if now taking standard deduction (increased to 24k per married couple), is it no longer “worth” or at least less palatable to carry a 3.5% mortgage?  I believe its a schedule A deduction.

Question will be to pay off 3.5% 30-yr mortgage vs 1.75% school loan first?

I realize the 1.75% payoff could even be debated as not doing at all, as not seemingly hard to beat that in market returns as posted about in a lot of places.  But I’m getting the itch to be debt free.

If mortgage was deductible interest, I was thinking of first disposing of school loans as it seems close to a wash.

If mortgage not being deducted because of higher standard deduction, paying mortgage first may make sense because at least that goes to an asset where the equity could be accessed in an urgent situation.

Thoughts?

 

 

Click to expand...

what about investing in a taxable account which once big enough to pay off the loans you use. especially since it will (very likely) beat 1.75%?

[Tabaxus]

This would normally be a person-by-person determination, but if the question is strictly paying off mortgage debt vs paying off student loan debt, as a mathematical matter, paying off the mortgage debt makes more sense without regard to interest deductibility.  The tax benefit of mortgage interest deduction should just be looked at as an effective reduction in the interest rate of the mortgage.  Even assuming full deductibility, unless you have a 50% marginal tax rate, it's not a wash like you're indicating above.

IMO this question is really more a general one about whether you should invest in the market rather than paying down either of these debts.  I think most people will tell you that mathematically it's probably going to work out better to invest.  If my student loans had been at 1.75%, I never would have paid them off.  Alas, I graduated in 2011 with $170k of SL debt at 6.8%/8.1%, and SOFI didn't really get doing until I had that down to a number where I just wanted it to be gone.  My own personal risk tolerance might lead me to pay off the mortgage before taxable investing with a mortgage at 3.5%.  The reduction in the effective rate of the mortgage after accounting for taxes could be enough to tip the scale in the other direction.  But this is very much a risk tolerance/guaranteed return vs. likely long-term return issue.

[DMFA]

...is "neither" an acceptable option?

The student loans are completely illiquid, whereas at least you could get more back from selling the house or borrowing against the equity should a catastrophe arise.

If you are going to choose to overpay on one of those two, I'd probably choose mortgage, but tbh I personally think your extra money is best used elsewhere: mutual funds in a taxable brokerage account, buying rental property, etc.

[Seabass]

Thanks for the replies!
All good thoughts.

[Zaphod]

Agree with the no need to be concerned crowd, but disagree where funds would be best applied. Student loan debt is the worst kind of debt, if anything gets attention I'd attack that. You're unlikely to live in that house for the duration, and you can simply sell the house and rent and be done with the mortgage if you wanted. You have no such option with the student loans, the collateral for that is you.

I would probably also never pay off a 1.75% student loan however and you can find major index dividends or even bond funds that will beat that over time. Thats below inflation.

[Parasternal]

Personally, I aggressively saved a large down payment on our home (> 50%) and financed the rest at 3.6%.

After that, turned my attention to student loans, which were at 1.6%. I made double payments on the student loans while dealing with the house. Once the house was addressed, aggressively paid of the remaining $150K of student loans.

This done by age 38. During this time, maximized tax advantage, funded 529, funded back door Roths, funded taxable accounts (when able).

Now, I'm 39 and putting as much I can into the taxable account. Also starting to explore real estate.

Mathematically, all the comments above apply. Emotionally, I wouldn't change a thing.

[Dicast]

I think on a mathematical standpoint you would be best investing the money. I don't believe it is a requirement to pay down any debt that accrues interest at below inflation. Your mortgage with deductions is even close to inflation. If you are very debt averse I would attack the mortgage first and try to ignore the student loans. At our house we are very debt averse but with our 15 year mortgage at 2.8% we are beginning to wind down the plan of early payoff and invest instead. We have some variable student loans that are creeping up in range and are sitting at 3.2% now. We'll finish them off this year because we don't like uncertainty. If you are at fixed rates though...hard to tell you to pay it off quickly.

[Zaphod]

Parasternal wrote:

Personally, I aggressively saved a large down payment on our home (> 50%) and financed the rest at 3.6%.

After that, turned my attention to student loans, which were at 1.6%. I made double payments on the student loans while dealing with the house. Once the house was addressed, aggressively paid of the remaining $150K of student loans.

This done by age 38. During this time, maximized tax advantage, funded 529, funded back door Roths, funded taxable accounts (when able).

Now, I’m 39 and putting as much I can into the taxable account. Also starting to explore real estate.

Mathematically, all the comments above apply. Emotionally, I wouldn’t change a thing.

Click to expand...

Over what time period was this and how much were the overall amounts you put into those items?

If you're income is large enough it really doesnt matter and its easier to just crush everything for the sake of simplicity, but not an option for everyone of course. The people the question apply to the most are usually having a bit of an either/or choice presented to them.

[Parasternal]

Age 33-38. OP asked which to pay off, mortgage vs loans. Just sharing how I decided to do it while maximizing tax advantage/Roths and contributing to 529s. He/she would obviously need to modify based on income or if needed, work more. Personally, I worked really hard my first 5 years in practice to meet our goals.

[hightower]

Agree with what's been said already for the most part.  I think it's mostly a personal choice at this point.  It's not wrong to pay off either debt and certainly it will save you money.  And I agree that the student loan debt is better to get rid of for reasons explained by Zaphod.  The argument for investing is strong over the long term, but in the short term it might not be ideal.  We're due for at least a market correction sometime soon.  That could be 2-3 years or 2-3 months, obviously no one knows for sure.  But, I'm personally in the mode of paying off debt now instead of investing more heavily because I'd rather be debt free during the next bear market so I can focus intently on buying cheap shares and maximize cash flow for that purpose.

I am curious what the balances are on your student loans and mortgage though.  If they're quite large, I think it would argue in favor of paying them down further.

For comparison, I have around 88k of student loan debt left at 2.625% and I'm planning on getting rid of all of it this year.  Once that's gone I will be focusing on a smaller family loan (from renovating our house) and then I'll be debt free except the mortgage, which I'm refinancing to a 15 year loan at 3.25%.  I don't plan on trying to pay it off any faster than that at this point.  I'm hoping that by time my student loans and family loan are gone that the market will be in a down turn and I'll be able to start investing heavily in cheap shares of index funds.

[Seabass]

23k of student loan at 3.5% should be paid off this quarter
123k at 1.75% student loan
209k at 3.5% mortgage (5 yrs into 30yr)

Live in NY state so I foresee schedule A deductions being a thing of the past with the 10k cap on SALT

I really appreciate all the points of view this post generated.
No wrong answer.
Investing is mathematical bottom line
Paying off is more emotional freedom staring at the excel file

Thanks again everyone. This has been a great introduction to the forum for me. What an awesome resource.

[jz]

https://www.whitecoatinvestor.com/pay-off-debt-or-invest/

WC blog addressed this question; a common question here.

[Seabass]

Indeed. That is a great post

My initial intention was to see what people thought of the 3.5% likely not being deductible any more in setting of higher standard deduction.

and then my post morphed into including the student loan and then into the invest vs debt question.

Sorta ran away from me there which I chalk up to being a rookie here. Lol.