My wife and I owe $450,000 on a $1.2 million house with a 3.5% mortgage rate. Our payments will soon increase. Should we pay it off or invest in stocks?

My wife and I owe $450,000 on a $1.2 million house with a 3.5% mortgage rate. Our payments will soon increase. Should we pay it off or invest in stocks?

Dear Big Move,

My wife and I purchased a home in 1999 for $500,000 on a 30-year mortgage with no down payment and low-interest adjustable-rate loan that we refinanced years later. We currently have a mortgage rate of 3.5% that is scheduled to end, and surely increase, in 2025.

The reason we did this initial type loan: We put the money into three 529 college funds and savings plans via mutual funds instead of principal to pay for our children’s college educations, which we did with the last one graduating recently.

We refinanced 25 years later and, as a result, still owe $450,000, but that home is worth $1.2 million. We are in our late 60s, in good health and we have a second home worth $900,000 that is fully paid for. Our savings portfolio has grown substantially over the years.

Our thoughts are to keep investing in the stock market instead of increasing our principal payment but this means we will never pay off this $450,000 home loan. Alternatively, we could also sell some of our portfolio and pay off the house before the rates go up.

Our total investment savings is around $2 million, plus the two home values. So should we sell, or keep our second home? Would like to hear your advice.

Family Man

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at [email protected].

Dear Eager,

What you have now is an ultra-low mortgage rate. Your rate will likely rise in 2025, based on current projections. The question is by how much? Given that you have $2 million-plus in savings, your best bet might be to wait and see what happens in 2025.

“Currently, we are all anticipating the Federal Reserve will start lowering rates in the second half of 2024,” says Edward Fernandez, president and CEo of 1031 Crowdfunding. “If that is the case and the rates can get down to an affordable level, then I would refinance my home to a fixed rate and not sell my investment portfolio to pay off the loan,”

That will give you more stability in terms of your payments, and enable you to stay invested in the market when it is doing well at present. On the other hand, you don’t say if you and your wife are still employed, or retired, which could affect your ability to pay the mortgage.

If it becomes unaffordable, “then it would be time to sell some of your investment portfolio to pay off the loan,” Fernandez adds.

So let’s walk through the two scenarios:

1. Repaying your mortgage now

After your rate adjusts in 2025, you reallocate some of the money in your investment accounts towards paying off the house in the short-term. As you have a total savings of $2 million, as well as the other $900,000 home, you still have at least 80% of your savings leftover for your retirement plans.

The pro of this scenario is that you’re debt-free. There is nothing quite like the feeling of owning nothing to anyone, so being debt-free on your two homes is something worth aspiring for. “You now have two homes that are free and clear, and if you ever needed to liquidate one, you could do so at your leisure,” Fernandez says.

The con is that you will be missing out on how much your money could have grown if it were invested in the market. You don’t specify the annual returns on your investments. So weigh that against the desire to be free and clear. Also, pay close attention to any withdrawal penalties, if applicable, when taking money out of your portfolio.

2. Continuing to invest in stocks

If you see the potential for a big gain in the stock market in the near-term, invest the money and let the rate adjust. The advantage of doing so is simply that you’ll be able to make more money from investing in the market, versus working on reducing your mortgage balance.

But the major disadvantage is the stock market’s unpredictability. And you still owe money on the house, and that balance still needs to be addressed soon. And your problem is only postponed to be addressed at a later date.

Additionally, you are still on the hook for the $450,000 whatever you decide. Given the two scenarios above, decide your risk tolerance, and whether you don’t mind waiting a year to see how 2025 pans out in terms of mortgage rates.

“Don’t be in a hurry to make a mistake, stand down, and let’s see what happens with rates,” Fernandez adds. The good news: You have the luxury of $2 million in savings to help you through any potential emergencies.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.