To pay off the mortgage or no?

[fireman44]

I will be retiring (hopefully) by the end of next year. By that time, I will only be 4 years from paying off my mortgage with a rough balance of around $30,000. The interest rate is 6.45%. I will have access to my 401-K and am debating whether to withdraw enough to pay off the balance. I also will have a monthly employer annuity along with a SS supplement (for those wondering, yes this is the federal FERS retirement)and another small public pension. My annual return on my 401-K (TSP) investment is around 5.7% over the past 10 years. I can adjust my monthly withdrawal amount annually so once I draw full SS I can reduce the monthly payment further. And by retirement time the mortgage interest deduction will be getting much smaller. So the question becomes do I leave the money in the 401-K and take the interest deduction for 4 more years or eliminate the house payment and take less out of my 401-K on a monthly basis? And yes, I am aware of the 20% tax they will take on the lump-sum withdrawal.

[snowpuppy]

As a former leo, do a girl a favor and tell me how you got such a whopping return on your TSP? I'm invested in the G Fund for safety and it's sinking fast.

 

That said, one of the smarter things to consider is to refi the mortgage on a 5 yr ARM if you can still qualify, DTI and all while you're still working. You'd have a new 5 yr note with a rate of 2.5-3% and the points and fees may be deductible and worthwhile if you still itemize.

 

I've never taken a TSP loan or w/d. Is it automatic 20% withheld or is that only if you're not 59 1/2 when you get the distribution? What is your interest rate if you take out a TSP loan for the $30k for say, 5 yrs? I looked at my TSP recently and it's less than 1.5% interest.

[zx10 guy]

I personally think it's better to leave things alone and not mess with the mortgage. Keep paying on the mortgage like you're doing now. Don't know what the full term of your loan is but being 4 years out from having the mortgage paid off means you've already paid most of the interest on your mortgage already. Paying off your mortgage now only saves you a little bit on the interest and removes you having to worry about a monthly payment. But the flip side is that you've locked in that money into an asset which has always been tougher to liquify into cash.

[fireman44]

As a former leo, do a girl a favor and tell me how you got such a whopping return on your TSP? I'm invested in the G Fund for safety and it's sinking fast.

 

That said, one of the smarter things to consider is to refi the mortgage on a 5 yr ARM if you can still qualify, DTI and all while you're still working. You'd have a new 5 yr note with a rate of 2.5-3% and the points and fees may be deductible and worthwhile if you still itemize.

 

I've never taken a TSP loan or w/d. Is it automatic 20% withheld or is that only if you're not 59 1/2 when you get the distribution? What is your interest rate if you take out a TSP loan for the $30k for say, 5 yrs? I looked at my TSP recently and it's less than 1.5% interest.

 

I'm basing it on the 10-year historical returns for the F fund. I know past returns doesn't guarantee future returns, but that's what you have to go on. No, I'm not able to refi due to still being in a Ch. 13. I will finish it just before I retire. I've taken out a TSP loan (just finished paying it off) and don't want to go back into that. Even when you take a partial w/d from your TSP, they withhold 20% in taxes. I will be 60 when I retire so the age issue won't matter.

[snowpuppy]

If you sleep better at nite with a paid mortgage, then I would say do it after 59 1/2 as TSP should only withhold 10%. Use one of those "Best Days to Retire" calendars to figure out when it's best for you to retire. If you withdraw funds in the year you retire and retire early in the year, then it should have less impact on your overall tax situation.

 

Keep an eye on your TSP returns between now and the date you retire. It may be more wise to withdraw funds sooner if the market and your return begin to tank.

 

No plans to retire here. I'll be at my desk until I die. Maybe longer.