Should I take money out of my CD to pay towards my mortgage?

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?

• Do you pay tax on the CD interest? If so, at what rate? Commented 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 Commented 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). Commented 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 Commented 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. Commented Jan 11, 2021 at 20:34

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%.