Cast your vote: how to pay off my mortgage early

[Amyolin]

I realize I’m beating a dead horse talking about paying off a mortgage early vs investing, but I’ve been paralyzed by my indecision and need fellow forum readers help!  On my personal investor statement I have a goal of paying off my mortgage in 10 years.  This will get me FIREd up!  One way or another, I must do this.  It is important to me.  I’m just not sure what the best way to do it is, and hence I need YOUR help.

I am 20 months into a 15 year mortgage fixed at 3%.  I owe 408K (at least So Cal has great beaches and year round sunshine).  I need to shave off 40 months to meet my goal.  In Feb 2028 I will have 117K left on the mortagage if I continue paying the $3100 I am currently paying.  By then I would hope I could lump sum pay it.  Yet here are the 2 options I’m considering:

#1.  Increase my monthly payment by $850 and mortagage will be gone in 10 years.  I will save ~20K in interest.  I realize this is probably not the wisest financial move, BUT...it is a guarantee that my mortagage will be gone.

 

#2.  Open a new Vanguard taxable account dedicated ONLY to my mortgage and put $850/ month into this account.  No other contributions here, only the $850 (I will continue my other taxable acct investments per my investor statement...this would be extra).  Allow it to compound and in 10 years take it out of the account and pay off the mortgage in a lump sum.  Assuming I can make a mere 3% I’d have the 117K.  If I could make 6-7% I’d have >130K.

-Questions on option #2:

a. How should I invest the $850/month?  All stock?  80/20? Something safer?  I’d come out ahead so long as I could get over 3% interest rate so I don’t need it to be terribly risky.  I’d like for it to make at least 3% and would be sad if it were worth less than that in 10 years.  So how aggressive does it need to be?

b. Would I incur a tax hit to take a lump sum of 117K out of the account to pay off my mortgage or are there other hidden fees I’m not thinking of if I were to go with option #2?

 

I’m thinking option #2 could be a fun 10 year experiment, And if the money grew more than I anticipated I could pay off my mortgage even sooner!!

 

So, please vote on option #1 or #2 OR pick your own option #3!  (FYI I already max all retirement vehicles, HSA, back door Roth, and I have a taxable I put into every month).

Thanks for reading this far if you made it to the end!  Excited to get your votes so I can finally take action!  I’m so tired of being indecisive.

 

 

[StarTrekDoc]

As far as the math -- both Option 1 and 2 gets you to FIRE.  The difference is Option 2 timeline will be determined by portfolio selection and its Market performance while Option 1 is pretty much a straight line.

We chose Option 2 7 years ago on Mortgage 600K.   3% (lower if you take into account deductions and compounding earnings) is not hard to beat -- even with a CA-muni heavy portfolio to balance risk.

 

[hightower]

I'd choose the guaranteed route (#1).  We could enter a terrible bear market 3 years from now or 6 years from now or 1 year from now and your account value could drop and not return.  The mortgage balance would remain the same.  If paying off the mortgage is really important to you, then do it in a way you're sure it's going to work

[Kamban]

You are early in your mortgage paying loan. Most of your payments are going towards interest. If you pay extra amount and direct it towards paying your principal, your total interest paid will fall.

If you are otherwise investing towards retirement ( tax deferred and taxable) I would use this extra money towards paying off this mortgage earlier.

 

[CordMcNally]

Judging by your post, I think you'd feel most comfortable with option #1. It's the only guaranteed option.

[Dr. Mom]

Split the difference 50:50 between the two. If you get way ahead on 2, lump sum it into mortgage early.

[Donnie]

Do one, the other, or both. Adding at least some of the $850 to taxable would at least get you in the habit of investing though. You can’t get wealthy by just paying off debt.

[The White Coat Investor]

Donnie wrote:

Do one, the other, or both. Adding at least some of the $850 to taxable would at least get you in the habit of investing though. You can’t get wealthy by just paying off debt.

Click to expand...

You can get back to broke though, which is almost as much fun.

To the OP: Life will change in the coming years. You'll likely have your income go up or get a windfall of some kind. Some years it might make sense to invest and some years it might make sense to throw money at the debt. We actually paid our mortgage off in three lump sums. When we had the money and no other good use for it (aside from taxable investing), we sent it to the mortgage company.

My point is you don't have to have some detailed plan to do this. If you just pay attention to your finances and if this is important to you, you'll likely find a way to accomplish it even if you don't do a thing about it for the first 5 years.

[jz]

Any money that you need/want within 3-4 years should not be in the stock market.  Agree with Hightower above.  You can count on the market to deliver over the long term, but not over the short ( 3-4 years).   I recommend investing until 2024, especially during the next correction or bear market. Then either 1) harvest the gains, or 2) allow the losses to recover.

[Rando]

The right answer really comes down to what your mindset and risk tolerance are.  You don't mention what you are making, but based on how much you are putting away I'm assuming you're doing OK.  My take would be if you are a very high earner or have a side gig like WCI, then you will probably have money to pay off the mortgage when you want no matter the strategy. If you are in one of the lower paying specialties then it might be better to pay down the principal either yearly or monthly.  I don't much like option 2 since you introduce unnecessary risk into the equation.  For me there was a great deal of satisfaction having the house paid off (and later my office building).  It's quite amazing how much easier handling finances and cash flow are when you don't have a mortgage.

[The White Coat Investor]

Rando wrote:

The right answer really comes down to what your mindset and risk tolerance are.  You don’t mention what you are making, but based on how much you are putting away I’m assuming you’re doing OK.  My take would be if you are a very high earner or have a side gig like WCI, then you will probably have money to pay off the mortgage when you want no matter the strategy. If you are in one of the lower paying specialties then it might be better to pay down the principal either yearly or monthly.  I don’t much like option 2 since you introduce unnecessary risk into the equation.  For me there was a great deal of satisfaction having the house paid off (and later my office building).  It’s quite amazing how much easier handling finances and cash flow are when you don’t have a mortgage.

Click to expand...

For sure there's something to be said for a budget without payments.

Quite literally the only things I have to buy each month are food (and even then we could probably go at least a full month), utilities (and honestly they probably wouldn't shut them off for a few months), insurance (and I guess that's optional too) and gasoline (but I guess we'd drive less.) So we spend some of it, give some of it, and invest the rest. Zero financial stress. Zero worry about making payments. If my group fires me tomorrow, it doesn't change my life financially. If WCI, LLC's income was cut by 75%, we'd simply invest and give less. It wouldn't affect our spending.

Increase income, decrease expenses, and decrease your fixed to variable expense ratio whenever possible and eventually you get an awful lot of financial freedom.

[wideopenspaces]

I agree with what others have mentioned about being flexible. We put an extra 1k towards our mortgage every month for the first 3 years. Then we realized how much our house had appreciated and suddenly our net worth was half equity and half investments. Since we're young, we decided it would be better to put that extra money into retirement funds this year, so that's what we're doing. You can always re arrange things pretty easily if what you are doing doesn't work for you at some point.

[Hank]

I'd lean toward Option 2.  Not too tough to beat 3%, even in taxable at a high marginal tax rate.

Really can't go wrong with either option or a combination of the two.