Would you sell stocks to pay down a mortgage?

[HardDrive]

Wife and I are considering many options right now. We recently picked up a rental house. 6.5%/15 year on the mortgage, we owe $250k. Thinking about scraping out some savings, and selling 100k in stock to pay it off completely. We bought the stock post Covid, and we have done well, bought it roughly 4 years ago. I think we could do this and still have about $100k in cash or equivalent when done. We will get dinged with capital gains on the way out, I believe 20% for our income. We have also considered paying off partially, and doing a recast.

Motivation is two fold, we simply want the old school satisfaction of having it payed off. We also want to reduce our debt load, because wife wants to reduce her income significantly next year. Noteworthy is that we could potentially live in this house, it could make a great retirement home for us.

What do you think? In this moment, would you sell stocks to pay down a higher interest rate mortgage?

[Gogar]

I paid off one against the advice of the calculator and it felt awesome.

You could 'only' send a chunk from savings and do a recast? Avoid the LT capital gains. Might have to be more than you want to spend to make any impact.

You could bet on a rate reduction and send a chunk and do a refi at the same time but that might be a while or never.

Also the stock could have an unfortunate turn.

[Dantilla]

I'd probably do it.

If you decide you miss making mortgage payments every month, you can always take out a new loan.

[jhynesrockmtn]

I have thought about this as well. I owe $360k on a small apartment building that is worth roughly $850k. My commercial interest rate was 3.9% for 5 years. It just adjusted to 5.9%, so not horrible, but not nuthin. I have been paying $1,200 more toward principal each month. That just adjusted to $975 with the payment adjustment. It's hard to know when to sell off a portion of your investments to pay down debt. My investment advisor would say don't. He thinks he can beat the 5.9%. I'd pay off the primary home first if you haven't done that.

[Alan A]

What stock has to be the first question, no?

[KFC911]

Though I can "run the numbers", I don't always maximize returns, and do my own thing.... always have.

Debt free is worth the cost in my little world... it's pricele$$.

Good problem you got there Josh ...

[cabmandone]

I'm not sure that getting rid of the deduction for interest on an income producing property is a great idea. Me personally, on an income producing property I'd play the odds that interest rates will drop in the next 12 months and plan to refinance to a lower rate and leave my stocks where they are since they're probably making me a higher rate of return than the interest rate.

[onewhippedpuppy]

I have done it and would do it again. By the numbers, in theory you can make more money in the market. But the bank can’t repo a paid off home either.

[Seahawk]

Originally Posted by Gogar

I paid off one against the advice of the calculator and it felt awesome.

Excellent perspective.

Originally Posted by Gogar

You could 'only' send a chunk from savings and do a recast? Avoid the LT capital gains. Might have to be more than you want to spend to make any impact.

You could bet on a rate reduction and send a chunk and do a refi at the same time but that might be a while or never.

Also the stock could have an unfortunate turn.

I am of the incremental approach as well.

I am sure you are as well: Before I commit, I am headed to my investment person then my CPA to provide financial and tax implication I will not know as well as they do.

[masraum]

My gut reaction is no, but I also think that it depends upon several factors. The peace of mind of having less debt and the rental property would be almost all profit once paid off. The market/stock could tank. The missus wants to reduce her income. You could be making more in the market, but while 6.5% isn't high, it's also not super low either.

[john70t]

https://www.drcalculator.com/mortgage/
Property $250,000
Downpay $0
Principal $250,000
Interest 6.5%
Term 15 years
Payment $2,177.77
Expenses $0.00
Total $2,177.77
Start date Sep 1, 2025
End date Aug 1, 2040
Length 15y
Reduction None
Total int $141,998.31
Total pay $391,998.31
Extra pay $0.00
Savings $0.00

Interest would be deductible but is significant to the total purchase price. 56%.
(Will the rental valuation increase by 56% in value over that time? Or the primary residence? There is a slowdown in the market and your local area might change for better or worse.)

If you have excess income for your lifestyle costs and need a lower bracket, keep the mortgage and current setup. You should also consider if your primary residence is in a desirable area and will appreciate or decline. Would living in the rental satisfy all your needs? Same access to services and goods? Job income dependability? If you are unsure start cutting overhead now.
(How much rental income will it bring during that time? It depends on the supply of good local renters and economy.)

The stocks could have gains. But they could also take a dive. It's a gambling world out there.
(Inflation, debt, BRICS, it all gets complicated)

Also consider the property taxes over a fifteen year period on both properties. A Homeowner's Exemption (if applicable in your area) can have a great impact on what you will be paying over time. For instance, I also have a small primary and a small old rental which makes zip, but every 8-9 years I pay in prop tax the equivalent cost of my house sale price. It adds up over time.

You might want to write it all down on a couple pieces of paper and weigh the different scenarios with your wife.

[cabmandone]

One more thing I'll add. If you're doing this right, the renter is paying the interest so it shouldn't bother you as much. I get wanting to be debt free, it's a wonderful thing. But at the same time, if the rent is greater than your principle and interest payment, why not let the renter make that payment and keep your money where it should be earning you more in interest than paying off the loan would otherwise save you?

[Seahawk]

Excellent post, John.

One last thing from me as well.

The housing market in certain areas of the country, is not Upsadasium in terms of value...in my area we are one Base Realignment and Closure from a lot of folks with single family homes losing some scooters.

That and if the renters are stable, I would ease my way into that significant a transfer of liquidity to a house that is being rented.

[911 Rod]

I think most of us old farts like to be debt free.

[KFC911]

I never wanted to be a freakin' banker nor a landlord like HD is .... so I quit both.

Remember how freakin' good that ice cream cone was years ago ?

Good luck...

[gregpark]

In a heart beat. This is a good time to be debt free and a good time to get out of the market

[Cajundaddy]

It's that old standard equation of risk vs return. Which do you value more? Do that.

I don't like RE with a mortgage other than my personal home so I would probably find a way to pay it off and manage the rental very carefully to make sure rent keeps up with inflation and provides long term income. For me, RE needs to produce 4% net annually in rental income with a 5% estimated average appreciation rate over 10 years. A 6.5% mortgage plus insurance, taxes, and property maintenance essentially eats all of the rental income for a net zero return. Not my dream ROI.

I recently sold my last rental property in CA and have moved into the market. I see too much risk in CA real estate rentals, and managing them in a state where the tenant has 95% of the rights with landlord having 5% keeps me awake at night.

For my own home I have a 3% mortgage and plan to keep that forever. I have enough in a MM account that I could pay it off tomorrow but so far the MM is a better place for my $$ right now. As rates come down over time I may re-evaluate.

Pencil out your real net return after mortgage, ins, ever-increasing taxes, and annual maintenance expense to see what makes sense. What if the tenant becomes a squatter, has a slip and fall, or gets electrocuted through no fault of your own but you must now defend yourself in a lawsuit, cover the mortgage, and have zero income on the property?

There is risk in everything we do and everything we don't do. Best wishes on making the right long term choice for you and your family.

[Bill Douglas]

The only real money I've ever made has been in rental real estate. I'd sell the stocks. Yep, a bit less ups and downs in real estate.

[gregpark]

I've also made the majority of my money in real estate. I'm waiting for the dip to buy more though. There's a lot of risk in stocks these days. I cashed out my MM account in 2019 and put it into precious metals. In 7 years the gold i bought has appreciated 157% and the silver 192%. Better than any stock or bond holdings i had for sure. And, metals hold value outside of the system... for now
If I were invest in any stock today it would be in mining

[Crowbob]

Having been born midway through the last century, give or take, I’m more inclined to maintain my wealth rather than make more of it. Life is much simpler.

Staying debt-free, turning stuff into jetsam, waving to the Joneses as they hustle and bustle past me in their fast lane, rolling around butt nekkid on a pile of Krugerands and suggesting to the grandsons they pull my finger is as much stress as I will let in, ever.