My wife and I owe $450,000 on a $1.2 million house with a 3.5% mortgage rate. Our payments will soon increase. Should we pay it off or invest in stocks?
Dear Big Move,
My wife and I purchased a home in 1999 for $500,000 on a 30-year mortgage with no down payment and a low-interest adjustable-rate loan. We later refinanced, and we currently have a mortgage rate of 3.5% that is scheduled to end, and surely increase, in 2025.
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The reason we did this type of loan: We put the money into three 529 college funds and savings plans via mutual funds instead of paying down the principal so that we could pay for our children’s college educations, which we did, with the last one graduating recently.
As a result, we still owe $450,000, but the home is worth $1.2 million. We are in our late 60s and in good health, and we have a second home worth $900,000 that is fully paid for. Our savings portfolio has grown substantially over the years.
Our thoughts are to keep investing in the stock market instead of increasing our principal payment, but this means we will never pay off this $450,000 home loan. Alternatively, we could sell some of our portfolio and pay off the house before the interest rate goes up.
Our total investment savings is around $2 million, plus the two homes. Should we sell or keep our second home? Would like to hear your advice.
Family Man
Dear Family Man,
What you have now is an ultralow mortgage rate. Your rate will likely rise in 2025, based on current projections. The question is by how much. Given that you have $2 million in savings, your best bet might be to wait and see what happens in 2025.
“Currently, we are all anticipating the Federal Reserve will start lowering rates in the second half of 2024,” says Edward Fernandez, president and CEO of 1031 Crowdfunding. “If that is the case and the rates can get down to an affordable level, then I would refinance my home to a fixed rate and not sell my investment portfolio to pay off the loan.”
That will give you more stability in terms of your payments and enable you to stay invested in the market when it is doing well, as it currently is. On the other hand, you don’t say whether you and your wife are still employed or are retired, which could affect your ability to make mortgage payments.
If those payments become unaffordable, “then it would be time to sell some of your investment portfolio to pay off the loan,” Fernandez adds.
So let’s walk through the two scenarios.
1. Repaying your mortgage now
After your rate adjusts in 2025, you reallocate some of the money in your investment accounts toward paying off the house. Because you have total savings of $2 million, you will still have at least 80% of your savings left for your retirement, along with your second, $900,000 home.
The advantage of this scenario is that you’re debt-free. There is nothing quite like the feeling of owing nothing to anyone, so being debt-free on both your homes is something worth aspiring to. “You now have two homes that are free and clear, and if you ever needed to liquidate one, you could do so at your leisure,” Fernandez says.
The downside is that you will miss out on how much your money could have grown if it were invested in the market. You don’t specify the annual returns on your investments. So weigh that against the desire to own your homes free and clear. Also, pay close attention to any withdrawal penalties you might be hit with if you take money out of your portfolio.
2. Continuing to invest in stocks
If you see the potential for a big gain in the stock market in the near term, invest the money and let the mortgage rate adjust. The advantage of doing that is simply that you’ll be able to make more money from investing in the market than you would pay in interest on your mortgage balance.
But the stock market is unpredictable. You still owe money on the house, and that balance still needs to be addressed, so in this scenario, you are only postponing your problem.
Whatever you decide, you are still on the hook for the $450,000. Think about the two scenarios above and about your risk tolerance, and decide whether you don’t mind waiting a year to see how 2025 pans out in terms of mortgage rates.
“Don’t be in a hurry to make a mistake. Stand down, and let’s see what happens with rates,” Fernandez says. The good news: You have the luxury of $2 million in savings to help you through any potential emergencies.
