I have a 15-year mortgage with a 6.375 percent interest rate and a $130,000 balance. I recently sold enough stock to repay the loan but am unsure if it's a good decision to retire the loan rather than reinvest the money. The monthly payment is $1,650. I recently retired but my wife still works and making the $1,650 payment is not a problem. I have no other debts and still have $600,000 invested in the stock market. Should I pay off the mortgage and invest the $1,650 monthly?
Whether it makes sense to prepay your mortgage depends on your tax rate, your attitude toward risk and what you expect to earn on the money if you invest it.
You've got a great mortgage rate. If you get to use the interest deduction on your taxes, it brings the after-tax cost even lower. If you're in the 30 percent bracket, your after-tax cost of debt is about 4.5 percent. To be better off investing, you need to earn more than 4.5 percent after-tax. You can do that risk-free with the two-year Treasury note or a 2-1/2 year CD. Stocks don't have a
guaranteed return, but can be expected to return more than the T-note or the CD over a longer term holding period.
Since you've already sold the stock, you've incurred any tax burden from the sale of those shares. Deferring the capital gains tax on the stock sales would have been another reason not to pre-pay the mortgage.
At its core you're asking should you invest $130,000 today, or $1,650 over the balance of the loan. I estimate that there's about 8.5 years remaining on your mortgage. Let's assume that all investment returns come in the form of capital gains taxed at 20 percent, and that the taxes aren't due until we sell the portfolios. We'll also assume that the investment in stocks earns 12 percent annually.
The lump sum would be worth $341,188 before tax and $298,950 after tax. The monthly investment would be worth $290,265 before tax and $265,871 after-tax. The income tax savings, invested to the end of the mortgage, would provide an estimated $15,750 after-tax. So under this scenario, you would be $48,829 better off by not prepaying your mortgage. But remember: There aren't any guarantees on the portfolio's return when you invest in stocks.