I need some help with the correct math to help me answer this question.

I have a CD that has a 10 year term, earning 4%, that I put $25,000 into to start. I have roughly 2 years remaining on my CD.

I have a mortgage on my house for $220,000 dollars with a rate of 2.5% for 15 years.

Would it be to my advantage to take the early withdrawal penalty and put what is in my CD towards my mortgage?

Or because it is earning higher interest should I leave it in the CD until it is done and put it toward my mortgage?

A third option, would it still be better to re-invest the money from the CD after the 2 years is up into a similar one and never put it towards my mortgage?

  • 1
    Do you pay tax on the CD interest? If so, at what rate?
    – Mike Scott
    Jan 11, 2021 at 20:15
  • @Mike to be honest this question is for a family member, He does pay taxes on it but I do not know the amount
    – Mr. Spock
    Jan 11, 2021 at 20:19
  • Cant’t really answer the question without knowing. If he pays 50% tax on the interest, the effective interest rate is only 2%. And of course, the reduction in interest payments from paying down your mortgage isn’t taxable (though part or all of the interest payments might be tax deductible).
    – Mike Scott
    Jan 11, 2021 at 20:21
  • I read online interest income is taxed at your income tax rate, if that is correct he would be paying 28.95%, hope that helps
    – Mr. Spock
    Jan 11, 2021 at 20:26
  • @J-Rome It's taxed at your marginal tax rate (the bracket) you're in. Since there's no 28.95% bracket, I'm assuming this is the effective interest rate, which means he's in a much higher bracket.
    – D Stanley
    Jan 11, 2021 at 20:34

1 Answer 1


All else being equal, earning 4% in a CD is better then "earning" 2.5% by paying extra on the mortgage (every $100 you put towards the mortgage reduces your interest by $2.50, effectively "earning" 2.5%). But you need to take the tax and penalty into consideration.

CD interest is taxable, so if his marginal tax bracket is 29% (as you said in the comments), the effective interest return is 4% * (1-.29) = 2.84%, which is still better than 2.5%, but getting closer. If he itemizes deductions, though, then the interest savings on the mortgage is actually reduced by the tax rate as well, making the difference closer to the original 1.5%.

He's already got a 15-year mortgage that he can (presumably) afford and has $25K saved up that he could tap if needed, so there's no pressing need for cash that you've indicated. Since there's no significant interest savings, I see no compelling reason to cash in the CD. It's not a horrible idea, but it isn't going to accomplish much in the end. If some emergency arises that he needs cash form then he can consider cashing it in to cover that, but putting it towards the mortgage doesn't accomplish much.

A third option, would it still be better to re-invest the money from the CD after the 2 years is up into a similar one and never put it towards my mortgage?

It depends again on what the CD rates are at that time, and how much other savings you have (to cover emergencies, etc.) If you don't need that much in savings, you might put it toward your mortgage, or even look for more risky investments that have a higher expected return. I don't mean risky in the sense that you'll lose it all, but risky in the sense that you'll do somewhere between earning 20% and losing 10%.

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