With $1m in Retirement Accounts, Should I Pay Off The 2.75% Mortgage or Invest The Cash?

Trying to decide how to handle a large mortgage, whether through a balance or high interest rate, is something far too many people are trying to decide right now. As a home is generally someone’s biggest monthly expense, anything that can be done to minimize costs sounds ideal. 

Unsurprisingly, one Redditor posting in r/DaveRamsey is considering whether or not they should continue with their 2.75% mortgage or pay it off. What makes this so unsurprising is the thought of how many different families are having this same conversation right now. 

Mortgage Strategy Advice

For this Redditor, they are looking at a scenario where they have a 2.75% mortgage with approximately $500,000 left on the balance. This is equivalent to a $3,400 monthly payment on a house that is currently worth around $850,000. 

Having bought the house seven years ago for $715,000, this isn’t a ton of growth, given what other areas of the country have done. This fact aside, the family has no other debt and has around $1 million sitting in retirement and non-retirement accounts. They also have $100,000 invested in 529 accounts, and around $40,000 in cash. With a household income of around $260,000 before taxes, the family doesn’t appear to be in dire straits. 

This said, in their early 40s, it’s not impossible to think that they might want to figure out how to reduce some of their expenses. As a result, they are seriously considering either paying off the mortgage balance entirely or in small chunks. For the latter consideration, they have thought of paying an additional $5,000 twice a year. 

However, the Redditor and their family also know that having at least half of their net worth tied up in a non-liquid asset isn’t the best idea, especially when you consider their mortgage rate is really attractive. With no other debt in the family and having listened to Dave Ramsey’s advice before, they really want to know if paying off the mortgage is the smart financial play. 

The Math Has to Make Sense

If the Redditor were in a situation where they had a much higher interest rate on their mortgage, this conversation might be entirely different. With a now-dreamy 2.75% interest rate, it’s hard to make any argument in favor of paying off the mortgage right now, no matter what the Dave Ramsey devotees will say. 

Given what the house has appreciated in seven years, the best thing to do is to keep the $1 million in investments. The hope is that over the next 10 years, this money can grow conservatively to close to $1.79 million at 6% annually. If the Redditor gets even more aggressive, they can earn even more. 

Where the math can get more interesting is when the Redditor takes the additional $10,000 they might have used as extra payments and instead puts this money into a high-yield savings account. With interest levels hovering between 3.5% (Capital One) and 4.30% (EverBank), over the next ten years, you’re talking about earning around $23,128 in interest at a 3.75% interest rate.

This number has to be weighed against how much of the mortgage principal and interest they will be paying off using the $10,000 instead to make payments. 

The Best Possible Advice

For now, the Redditor should absolutely maintain their 2.75% mortgage and keep paying as they have for the last seven years. The best scenario is to keep investing cash in a diversified portfolio that is going to average better returns than the home value will increase. They already have $40,000 in cash, so there doesn’t need to be a ton of buildup for an emergency fund, so there is more money available to put toward long-term financial goals. 

If they are already making a good return on the current $1 million portfolio, it stands to reason they could add the $10,000 in additional mortgage payments they are considering making every year. The extra interest in a high-yield savings account isn’t going to change their lifestyle, but paying off the mortgage faster would. 

This is a good opportunity to consult a financial advisor if they haven’t done so, to help model out various economic scenarios. A fiduciary advisor is going to be the right person who can help determine if they should pay off the mortgage or keep going based on the family’s individual financial and retirement goals, and these goals are different for everyone.