Question: I have a morgage where I owe around $210k with 26 years 6 months left with a 2.99% interest rate.

I have an intelligent portfolio w/ Schawb (minimum cash, max growth setup) with around 180k. I am adding around $3.5k a month to it currently.

My first thought would be for the portfolio to cover my morgage while also acting as a cash reserve initially while I build up a new reserve and have the account be $0 or close to it by the end of the morgage. My hope or assumption would be that the portfolio would grow at more than 2.99%...

The thought would be that I would not need to budget for a morgage as it would essentually be paid for.

The other option would be to pay it off and YOLO it (I still have some other cash reserves).

Would this be an appropriate use of the intelligent portfolio? Or should I be looking at another investment method?

Answer:

Evaluating Whether to Use Your Investment Portfolio to Cover Mortgage Payments or Pay Off Your Mortgage Early

Hello! It's great that you're thinking strategically about your mortgage and investment portfolio. Making an informed decision in this area can have a significant impact on your financial future. Let's break down your options and consider the pros and cons to help you make the best choice for your situation.

Your Current Situation

Option 1: Use the Investment Portfolio to Cover Mortgage Payments

Idea: Allow your investment portfolio to grow and use it to make your mortgage payments over time, with the expectation that the portfolio's returns will exceed the 2.99% mortgage interest rate.

Potential Benefits:

  1. Higher Expected Returns:

    • Market Growth Potential: Historically, diversified investment portfolios have yielded average annual returns higher than 2.99%, especially over long periods.
    • Compound Interest: Continued investments and reinvested returns can significantly grow your portfolio over 26 years.

  2. Liquidity and Flexibility:

    • Access to Funds: Keeping money in an investment account allows for greater liquidity compared to paying off a mortgage.
    • Financial Cushion: The portfolio can act as a financial buffer for emergencies or opportunities.

  3. Tax Advantages:

    • Mortgage Interest Deduction: If you itemize deductions, you may benefit from the mortgage interest deduction (though with the standard deduction, this may not apply).
    • Tax-Efficient Growth: Investments held for over a year qualify for long-term capital gains tax rates.

Potential Risks and Considerations:

  1. Market Volatility:

    • Investment Risk: There is no guarantee your portfolio will outperform the mortgage interest rate. Market downturns could reduce your portfolio's value, affecting your ability to cover mortgage payments.
    • Sequence of Returns Risk: Withdrawing funds during a market decline can deplete your portfolio faster.

  2. Psychological Factors:

    • Debt Stress: Some people prefer the peace of mind that comes with eliminating debt.
    • Discipline Required: You need to stay committed to not increasing spending with the extra cash flow.

  3. Cost of Mortgage Payments:

    • Cash Flow Impact: You still need to budget for mortgage payments unless you systematically withdraw from your portfolio.

  4. Tax Implications on Withdrawals:

    • Capital Gains Tax: Selling investments to cover mortgage payments may trigger capital gains taxes.

Option 2: Pay Off the Mortgage Early

Idea: Use your investment portfolio and cash reserves to pay off your \$210,000 mortgage now, eliminating the debt and monthly payments.

Potential Benefits:

  1. Guaranteed Return:

    • Interest Savings: Paying off a loan at 2.99% is like getting a guaranteed 2.99% return on your money.
    • Risk-Free: Eliminates the uncertainty of market performance.

  2. Cash Flow Improvement:

    • No Mortgage Payments: Frees up the amount you were paying monthly, which can be redirected to investments or other financial goals.

  3. Psychological Peace:

    • Debt Freedom: Reduces financial stress and improves your sense of security.

  4. Simplified Finances:

    • Less Complexity: Fewer accounts and payments to manage.

Potential Risks and Considerations:

  1. Opportunity Cost:

    • Potential Higher Returns Elsewhere: By investing, you might earn more than 2.99% over the long term.
    • Liquidity Reduction: Tying up a large amount of cash in home equity reduces your liquidity.

  2. Tax Deductions:

    • Loss of Mortgage Interest Deduction: If you itemize deductions, losing the mortgage interest deduction might increase your taxable income.

  3. Inflation Impact:

    • Low-Cost Debt: With inflation averaging around 2% historically, your mortgage interest rate is relatively low-cost debt.

Additional Considerations

  1. Risk Tolerance:

    • Comfort with Market Risk: Are you comfortable with the potential fluctuations in your investment portfolio?
    • Debt Aversion: How important is it to you to be debt-free?

  2. Financial Goals:

    • Retirement Planning: Consider how either option affects your long-term retirement goals.
    • Other Obligations: Do you have other debts or financial responsibilities?

  3. Diversification:

    • Asset Allocation: Ensure your investment portfolio is well-diversified to manage risk effectively.

  4. Emergency Fund:

    • Adequate Reserves: Maintain an emergency fund to cover 3–6 months of living expenses, regardless of your decision.

  5. Tax Efficiency:

    • Capital Gains: Be mindful of the tax implications when selling investments.
    • Consult a Tax Professional: Personalized advice can help optimize your tax situation.

Alternative Strategies

  1. Partial Mortgage Payoff:

    • Lump Sum Payment: Make a substantial payment toward your mortgage principal to reduce the balance and interest paid over time.
    • Recast Your Mortgage: Some lenders allow mortgage recasting, which recalculates your monthly payments based on the new lower principal, reducing your monthly obligation without changing your interest rate or loan term.

  2. Increase Investment Contributions:

    • Accelerate Portfolio Growth: Continue making mortgage payments as scheduled but increase your investment contributions to potentially enhance future returns.

  3. Refinance Your Mortgage:

    • Lower Interest Rate: If current mortgage rates are lower than 2.99%, refinancing could reduce your interest costs (though rates are currently higher, so this may not be viable).

  4. Hybrid Approach:

    • Balance Both Goals: Allocate some funds to pay down the mortgage and keep investing the rest, achieving a middle ground.

Recommendations

Conclusion

Both options have valid merits, and the best choice depends on your individual circumstances, risk tolerance, and financial goals. Using your investment portfolio to cover mortgage payments could potentially lead to greater wealth accumulation over time but comes with market risk. Paying off your mortgage offers certainty and peace of mind but may result in lower long-term financial growth due to the opportunity cost.

Final Thoughts: