I got this email:
My husband and I are trying to decide if we should pay off our mortgage when we sell our short term rental property this Spring.
Here are our numbers:
I am 47 and my husband is 48
- Mortgage owed on primary: $273K (value is $1.3M)
- Mortgage owed on rental: $458K (value is $950K)
Investments saved between 401K, TSP, brokerage: $2.2M
No debt besides mortgage
529 for 2 kids fully funded: $160K
Husband Income: $235K
We would like to retire in 8-10 years. My husband still likes to work and has some professional goals.
My income as a real estate agent is variable and hard to estimate. Right now I pay myself $5K a month salary and half that goes to my 401k.
The other half makes it so we can pay our bills each month when combined with my husband’s income.
If I stop working then we can’t cover all the bills off my husband’s income but if we pay off the mortgage then we can, which would be nice and take the pressure off of me.
My job is stressful, and after 20 years, I am kind of over it. I am sure I will keep it up in some capacity but not what I have been doing.
A good part of our investments is money I have dumped into the brokerage account from my business.
My thought is if we make about $500K on the rental sale we could take $273K and pay off the primary mortgage and invest the balance ($227K approx)
Would love your thoughts on this. We are truly conflicted and know we will get a lot of opinions if we pay off the 2.5% mortgage.
Overall, I say Yes. Pay off the mortgage.
You give up some returns, yes, but it lowers monthly expenses NOW. That allows you to work less. That’s a great thing.
I’m lazy though, so I asked Gemini to break it down to quantifiable dollars.
How much will it cost to pay off the mortgage early?
It’s about $193K, which is about 5% of their current net worth.
It’s not nothing, but only 5% of their net worth over several years.
The Details
All from Gemini 2.0 Flash Thinking
“Our enhanced reasoning model, capable of showing its thoughts to improve performance and explainability”
Overall Situation Assessment:
You are in a very strong financial position with a substantial net worth (approximately $3.879 million), healthy income, and significant investments. Your goal of retiring in 8-10 years is very achievable. Your key decision is whether to pay off your primary mortgage using proceeds from the rental property sale.
Initial Recommendation (Based on Initial Information):
Initially, I leaned towards recommending that you DO pay off your primary mortgage. This was primarily due to the significant qualitative benefits:
- Reduced Stress & Increased Peace of Mind: Eliminating the mortgage payment significantly reduces monthly expenses and financial stress, especially as you consider stepping back from your stressful real estate career.
- Increased Flexibility & Options: Provides more freedom in work choices and lifestyle leading up to retirement.
- Guaranteed Return: Paying off debt offers a guaranteed “return” equal to your mortgage interest rate (later revealed to be 2.5%).
- Simplification: Fewer debts mean simpler finances.
Pros and Cons of Paying Off the Primary Mortgage:
Pros:
- Significant Reduction in Monthly Expenses: Frees up cash flow.
- Peace of Mind and Reduced Financial Stress: Owning your home outright is emotionally beneficial.
- Flexibility and Options: More freedom in work and lifestyle choices.
- Guaranteed “Return” on Investment: Guaranteed 2.5% return on the amount used to pay off.
- Simplification: Simpler finances.
Cons:
- Opportunity Cost – Foregone Investment Growth: The $273,000 could potentially grow more if invested (especially given the low 2.5% mortgage rate).
- Loss of Potential Tax Deduction (Minor): Potential small loss of mortgage interest tax deduction.
- Reduced Liquidity (Minor): Slightly reduces liquid assets.
Comparison of Payoff vs. Investing $273,000 (Financial Opportunity Cost):
At a 2.5% Mortgage Rate, Financially, Investing Potentially Wins: Your 2.5% mortgage is very inexpensive debt. Investing $273,000 has the potential to yield significantly higher returns over 8-10 years compared to the guaranteed 2.5% “return” of paying off the mortgage.
Quantified Opportunity Cost (Net Benefit of Investing Over Paying Off Mortgage):
| Timeframe | Mortgage Interest Saved (Payoff) | Investment Gain at 5% | Net Benefit of Investing at 5% | Investment Gain at 7% | Net Benefit of Investing at 7% | Investment Gain at 9% | Net Benefit of Investing at 9% |
| 8 Years | $54,600 | $129,400 | $74,800 | $197,000 | $142,400 | $271,000 | $216,400 |
| 10 Years | $68,250 | $171,500 | $103,250 | $261,000 | $192,750 | $356,000 | $287,750 |
This table shows the potential additional wealth gained by investing compared to the interest saved by paying off the mortgage.
Retirement Readiness Check:
Even without maximizing investment gains or paying aggressively into investments moving forward, your current investment portfolio and projected growth suggest you are already on a very strong path to a comfortable retirement.
Refined Recommendation (Considering 2.5% Mortgage Rate and Lifestyle Priorities):
With the very low 2.5% mortgage rate, the purely financial argument is stronger for not paying off the mortgage and investing the $273,000. However, your situation is significantly influenced by your desire to reduce stress and gain work flexibility.
Consider Paying Off the Mortgage IF:
- Stress Reduction and Peace of Mind are Top Priorities: The guaranteed reduction in stress and increased peace of mind outweigh the potential for higher investment gains.
- You are Risk-Averse: You prefer the certainty of eliminating debt over the volatility of market investments, especially as you approach retirement.
- You Value the Psychological Benefit of Homeownership: Owning your home outright is emotionally important to you.
Consider NOT Paying Off the Mortgage and Investing IF:
- Wealth Maximization is Top Financial Goal: Your primary goal is to have the largest possible nest egg, and you are comfortable with market risk.
- You Can Manage Stress Even with the Mortgage: You can manage stress effectively without paying off the mortgage and don’t feel a strong emotional need to eliminate it.
- You Believe You Can Achieve Higher Investment Returns: You are confident in achieving investment returns higher than 2.5%.
Compromise Option: Consider paying down a portion of the mortgage to reduce monthly payments and stress, while investing the remaining funds.
Next Steps:
- Discuss with Your Husband: Weigh the financial opportunity cost against the lifestyle benefits together.
- Re-assess Stress Levels and Work Priorities: Evaluate how much paying off the mortgage would actually reduce stress and improve your life.
- Consider a Compromise: Explore paying down a portion of the mortgage.
- Make an Informed Decision: Choose the path that best aligns with your values, priorities, risk tolerance, and desired lifestyle, understanding both the financial and non-financial implications.
Current Net Worth:
Your current estimated net worth is approximately $3,879,000.
Final Thought: The “right” decision is personal and depends on your priorities. It’s about balancing potential financial gains with your desire for peace of mind and a less stressful lifestyle. You are in a fantastic position to make a choice that truly benefits your overall well-being.