Pay off mortgage or buy T bills?

[Melisande]

We have  about $18,900 outstanding on our mortgage (3.3% interest rate). We also have enough cash to pay it off. It seems pretty clear that it would be better to just pay it off, rather than keep on with the monthly payments and invest the $18,000 in 3 and 6 month T-bills, as the current 3 and 6 month T-bill interest rates are lower than our mortgage rate.

I did some calculations and we would save $831 in interest payments, whereas if we invested that in 3-month T-bills which we rolled over, we would only earn a little more than $400. If we combined 3-month and 6-month T-bills, we still wouldn’t make it to $831.

What do you think the chances are that interest rates are going to spike above 3.3% in the near term? Or should we just go with the paying off of her mortgage.

For context, we currently have about $140,000* in cash (checking and money market accounts) as well as about 3M in investments.

*Yes, I realize this is a lot to keep in cash, but our investments are doing well (looking at the long-term) and having lots of liquidity is relaxing. I think we can spare $18,900 though ….

[FIRE@50]

Have you considered longer term investments? Why only 3 or 6 months?

[Melisande]

Have you considered longer term investments? Why only 3 or 6 months?

I was just trying to do a head-to-head comparison of what we could do with the $18,900. If we don’t pay off the mortgage early, we will pay it off in 9-months. So, I was thinking about what else we could do with that money in 9-months for an oranges to oranges comparison.

But sure it might make sense to explore other options too,

[ChpBstrd]

Well, futures markets are pricing in a 100% chance of the Fed hiking the Federal Funds Rate on Sept. 21, and that will have an effect on short-duration T-bills. A 4% FFR is in the forecast for the near future, which could mean 4.5% 3-6 month yields.
https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

I would plow your extra funds into I-bonds yielding 9.62%, exempt from state taxes. You can cash them out after 1 year if you are willing to forfeit the last 3 months' interest, but when you are borrowing at 3.3% for part of that time and earning 9.62% risk free I think the math works even if you take the penalty.

[dandarc]

+1 to i-Bonds. Pretty much guaranteed to come out ahead that way. Since the alternative is paying off the mortgage which means the money is just gone, the 12 month holding period for i-Bonds shouldn't mean much to you.

Although for this little amount of money it really doesn't matter all that much.

[Dicey]

+1 to i-Bonds. Pretty much guaranteed to come out ahead that way. Since the alternative is paying off the mortgage which means the money is just gone, the 12 month holding period for i-Bonds shouldn't mean much to you.

I'd rather have that money in ibonds and have a mortgage rate that kicks ass. Leave the payment on autopsy* and let inflation eat away at it. Simple.

*Lol, just noticed this hilarious autocarrot. I meant "autopay", but this is funnier, so stet.

[nereo]

Have you considered longer term investments? Why only 3 or 6 months?

I was just trying to do a head-to-head comparison of what we could do with the $18,900. …

But sure it might make sense to explore other options too,

People have already suggested iBonds (great option), and waiting for yields to rise above 3.3% in the short term (incredibly likely).


There are a lot of things which will have a better return than a 3.3% mortgage. Viewed another way  that’s less than $600 saved each year.
AS one example, if your home has decent solar exposure, chances are you will get much better returns (in the form of lower energy bills) installing PVs.  Spending on insulation (even if you pay a contractor to install) can also lower your heating and cooling bills by far more than $600/year, depending no your existing home. Ditto for heat pumps.

Bottom line, if spending $18k on efficiency improvements will save you >$600 Y/Y in ongoing expenses it’s a far better use of your money than paying off the mortgage early.

[wageslave23]

I'll be the contrarian and say you should pay off the mortgage and invest in ibonds and look into the other options. They aren't mutually exclusive.  The mortgage is 3.3%, pay it off because that's a lot higher interest rate then your money market or savings account. Get a home equity line of credit for security if you wish. But at your asset level, you are basically bulletproof from an emergency cash situation.  Also none of this matters in your big picture financial situation.

[Dicey]

I'll be the contrarian and say you should pay off the mortgage and invest in ibonds and look into the other options. They aren't mutually exclusive.  The mortgage is 3.3%, pay it off because that's a lot higher interest rate then your money market or savings account. Get a home equity line of credit for security if you wish. But at your asset level, you are basically bulletproof from an emergency cash situation.  Also none of this matters in your big picture financial situation.

Comparing the mortgage rate  to a suboptimal investment like MM or savings account is a total head scratcher, especially on this forum. Why not compare the mortgage rate to I-bond yields? Ignoring inflation makes no sense either.

The whole concept of mustachianism is contrarian. Do the math, follow the results.

[wageslave23]

I'll be the contrarian and say you should pay off the mortgage and invest in ibonds and look into the other options. They aren't mutually exclusive.  The mortgage is 3.3%, pay it off because that's a lot higher interest rate then your money market or savings account. Get a home equity line of credit for security if you wish. But at your asset level, you are basically bulletproof from an emergency cash situation.  Also none of this matters in your big picture financial situation.

Comparing the mortgage rate  to a suboptimal investment like MM or savings account is a total head scratcher, especially on this forum. Why not compare the mortgage rate to I-bond yields? Ignoring inflation makes no sense either.

The whole concept of mustachianism is contrarian. Do the math, follow the results.

Midwest.

Because they have $140,000 in savings and you can only put $20k a year in ibonds. If there was no limit on ibonds I'd say put the whole thing in ibonds. But it is limited, that's why I said do both. At $3m, it's more about risk management than growth and leverage.

[Dicey]

I'll be the contrarian and say you should pay off the mortgage and invest in ibonds and look into the other options. They aren't mutually exclusive.  The mortgage is 3.3%, pay it off because that's a lot higher interest rate then your money market or savings account. Get a home equity line of credit for security if you wish. But at your asset level, you are basically bulletproof from an emergency cash situation.  Also none of this matters in your big picture financial situation.

Comparing the mortgage rate  to a suboptimal investment like MM or savings account is a total head scratcher, especially on this forum. Why not compare the mortgage rate to I-bond yields? Ignoring inflation makes no sense either.

The whole concept of mustachianism is contrarian. Do the math, follow the results.

Midwest.

Because they have $140,000 in savings and you can only put $20k a year in ibonds. If there was no limit on ibonds I'd say put the whole thing in ibonds. But it is limited, that's why I said do both. At $3m, it's more about risk management than growth and leverage.

Honestly, I missed the "3M". They've won the game, they can do whatever they want.

[wageslave23]

I'll be the contrarian and say you should pay off the mortgage and invest in ibonds and look into the other options. They aren't mutually exclusive.  The mortgage is 3.3%, pay it off because that's a lot higher interest rate then your money market or savings account. Get a home equity line of credit for security if you wish. But at your asset level, you are basically bulletproof from an emergency cash situation.  Also none of this matters in your big picture financial situation.

Comparing the mortgage rate  to a suboptimal investment like MM or savings account is a total head scratcher, especially on this forum. Why not compare the mortgage rate to I-bond yields? Ignoring inflation makes no sense either.

The whole concept of mustachianism is contrarian. Do the math, follow the results.

Midwest.

Because they have $140,000 in savings and you can only put $20k a year in ibonds. If there was no limit on ibonds I'd say put the whole thing in ibonds. But it is limited, that's why I said do both. At $3m, it's more about risk management than growth and leverage.

Honestly, I missed the "3M". They've won the game, they can do whatever they want.

+1

[EchoStache]

I'd buy $40,000 in Ibonds today.  You and spouse can each buy $10k, and you can each buy $10k as a gift for the other.  The gifts can't be redeemed until next year, but the interest accrues right away at the current rate.  It's likely(correct me if I'm wrong) that the next 6 month inflation rate will still be quite good, and likely quite a bit higher than any other treasury bonds.  This will give you at least a year of very solid returns....6 months at 9.62% followed by 6 months at whatever the next rate will be.

I'd ALSO pay off the mortgage today if I had 3M and over $100K cash.  The feeling of having no mortgage, IMO, will be worth more than the $3 extra you might be able to make by doing something more mathematically optimal. 

[Niceday]

Pay off the mortgage for the peace of mind. Put some of your cash in I-bonds if you haven't. Also put some of your cash at least in an online savings account which gives you a higher interest rate than a regular savings account.

[Brystheguy]

Pay it off and breathe a sigh of relief. Look around - that's all yours and no one can touch it. (Unless you stop paying your property taxes!)

[talltexan]

Isn't there some kind of checking account you can open and put $18,000 in to get a $500 incentive? That would--risk free--pay for the interest that remains on your mortgage.