Editor’s note: A version of this question originally appeared on Reddit.
I’m looking for advice on ways to either pay off my mortgage completely, or reduce my monthly mortgage payments. I joined a pre-IPO tech startup a couple years ago and received some stock options. We went public and the stock went up — I’ve currently got about $150,000 worth of vested stock options.
Early next year, I’ll hit another vesting milestone and my stock options should be worth around $180,000.
During the pandemic, I refinanced my mortgage to get a lower rate (2.35% APR). I have a 30-year mortgage and have a remaining balance of about $170,000.
I’m thinking about selling my stock options and paying off my mortgage early. That would give me the freedom to get off the corporate treadmill and start my own business. What do you think I should do?
First, congratulations on the successful IPO. It’s exciting that your stock options are now worth enough that you can start thinking about how to deploy your money to achieve your life goals.
I don’t know enough about your financial situation to give you a definite yes or no here. Unknowns:
- Have you exercised your stock options yet?
- What taxes can you expect to pay if you were to sell your shares today?
- Do you plan to live in your house forever?
- What is the current value of your house?
- What other assets do you have? Emergency savings? Retirement fund?
- How old are you? How close are you to retirement? Do any of your other investments generate income?
For example, let’s say you’re in your mid-30s, with $180,000 worth of unexercised stock options, $200,000 in other retirement accounts and $170,000 remaining in a mortgage on a starter house that you’d like to eventually sell.
I understand the allure of paying off your mortgage entirely. However, there are a couple of pitfalls to consider first. The big one is that your shares are highly liquid — if you run into an unexpected expense, you can easily sell half of your shares to generate the cash you need.
Your house is an illiquid asset — it’s considerably harder to sell half of your house to generate cash.
The other big consideration is that you can likely generate annual returns in excess of your mortgage rate if you were to invest your money elsewhere. The S&P 500 has historically returned gains of 8- to 10 percent each year since 1926.
If your company is growing and it’s managed well, your shares might even beat that rate of return over time.
One final thing to consider: Starting a business means taking on greater-than-average financial risks. Bootstrapping the business by working a salaried job during the day and working on your company at night can de-risk the equation, by giving you the cash runway you need to find product-market fit.
If you quit your job, sell your shares and put the proceeds into your mortgage, you could find yourself with a very short cash runway, facing intense pressure to turn a profit immediately.
- Vieje Piauwasdy, Director of Equity Strategy, Secfi
Do you have a question about your stock options? Email us at firstname.lastname@example.org