Posted on 07/15/2009 6:48:43 AM PDT by Kaslin
Dear Carrie: I have over $600,000 in CDs at 3 percent interest. I have a mortgage balance of $100,000 at 5.125 percent. Would you advise that I go ahead and pay off my mortgage or leave the money in CDs? -- A Reader
Dear Reader: On the surface, the answer to your question might appear to be a simple calculation. But in reality, the decision to pay off a mortgage can be more complex. So I'm going to start by posing a few more questions that you may want to factor into your decision.
For instance, how many years are left on your mortgage? How close are you to retirement? Does the $600,000 in CDs represent your complete nest egg? Since I don't know your specific answers, I can only give you some broad guidelines to take into consideration.
Consider the real cost of your mortgage.
You say your current mortgage is at 5.125 percent, but have you factored in the tax deductibility? Let's assume you're in the 35 percent tax bracket and your mortgage interest is fully deductible. In this instance, a 5.1 percent mortgage would actually cost around 3.3 percent. Almost a wash with the 3 percent you're making on your CDs.
Factor in future investing opportunity vs. risk.
As I'm sure you know, investments that carry the most potential for reward generally also have the highest risk. A CD is at the very low end of the risk/reward spectrum. So think about your comfort level. Would you prefer to invest your money in potentially higher-yielding investments? If you think you can do better than 3 percent and are willing to take the risk, perhaps paying off your mortgage isn't the right decision.
On the other hand, current interest rates on CDs are very low right now. If you don't want to increase your risk level and can't match the 3 percent you're making now as your CDs come due, taking the money and paying off your mortgage might make the most sense.
Determine your cash needs.
It appears you're in a very strong cash position, so liquidity may not be as much of a concern for you as it might be for others. A preference for liquidity might keep you from paying off a low-rate mortgage prematurely even if you can't do as well or better with an alternative use of the money. Diversification could play a role here, too, as you look at your mortgage in light of your overall financial plan.
Evaluate your tax situation.
Home mortgage debt remains one of the few sources of tax-deductible interest expense left to individuals who aren't involved in a trade or business. IRS rules say you can deduct the interest expense on up to $1 million ($500,000 for married filing separately) of home-secured debt used to purchase or make capital improvements on your qualified principal and/or second residence.
You can also deduct the interest expense on up to $100,000 ($50,000 for married filing separately) of home equity debt secured by your home, whether in the form of a regular loan or revolving line of credit. Once you've paid off the original mortgage, you'll be limited to the $100,000 home equity debt ceiling unless you make capital improvements or buy another home.
Because your current mortgage balance is $100,000, this may not be important to you. Also, if you have fewer than 10 years left on your mortgage, more of your payment is likely going toward principle than interest, so tax deductibility may not be a real concern.
Think about your peace of mind.
For some folks, a strong desire to be debt-free overrides other considerations. There's an emotional security in owning your home free and clear, and this seems to be especially true for those who are near or in retirement. If that's the case for you, all other concerns may take a back seat.
As you can see, there isn't one right answer to your question. It's more a matter of the right balance for you. If the time you have left on your mortgage is short, if the tax deduction is not significant, and if you're secure in the amount you have saved for retirement and less concerned about future investing opportunities, you may very well benefit from paying off your mortgage. As always, you should check in with a financial advisor for a more in-depth review of your personal situation. Ultimately, it sounds like you're in a good position no matter what choice you make.
Good luck!
Considering that you do not know the property value, mortgage balance, or the time remaining on the loan I found the advice very prudent.
The only logical portion of what you said is the part about peace of mind. The remainder is a fairly simple mathematical computation.
There'd be a lot of crushed acorns if that happened in Texas.
Yeah, interfering with private contracts (like the screwing over the Chrysler secured bondholders took at the hands of Obama and Rattner, who just quit) creates all kinds of questions and uncertainties.
It will raise the cost of capital, or cut it off completely, to companies experiencing financial troubles, due to fears that Obama socialists will simply void their collateral.
But for me, I wouldn’t bet on them somehow replacing a 5% mortgage with an 8%. It would be much easier to just raise taxes, stealthily, as they are doing now, IMO....
The lifetime renter speaketh
A well thought out answer, IMO.
As a bookkeeper, I would liked to have had more info from the person asking the question.
Respondent is correct is getting the comparison of the interest earned vs the tax implications of the mortgage interest. I say- pay it off IF this is where you want to live the rest of your life, and the interest rates for both sides are so close.
IF you are close to retirement, and you want to live elsewhere in the future, I say- take out all the equity you can, keeping paying the payments until you are ready to move, and perhaps your buyer can take over your payments, and only put out the cash for your net equity.
There is NO deduction for mortgage interest IF you are no longer working and have NO INCOME!!!! I have seen more than one person forget that part of the formula when they are working on such a problem.
What I really hope is that this person has their CD’s in more than one location/bank and have all their money thoroughly protected. Don’t want to get caught with too much money in any one bank and get burned. Took too long to make the money, and this also is AFTER tax money.
If you are getting ready to retire in another place, I advise with the current White House that you accumulate as much cash as you can- even keeping some of it out of the banks. A few dollars of interest- which you lose some of to taxes, also, isn’t worth the effort.
Start stalking the areas where you think you want to move to. Use your vacation and holiday time to do this. The internet is very useful for seeing what is available in any area you might want to do a followup trip to.
Start looking for where you want to go, and see if you can find a seller who is willing to stay in the property and pay you a small rent...and take care of the property for you. Then you can review what items you have that won’t work for the new place, and you can raise more cash by either selling things for cash- or donating them and taking the charity deduction while you are STILL working and creating an income.
I personally don’t sell/give away anything until AFTER I move, because I don’t want to have to repurchase ANYTHING that I may have sold. I like the words “it’s paid for”.
It isn’t that hard to find a property that an older person is selling because they are in too big a place now, and suffering from empty nest syndrome. OTOH, they also might have been there a very long time, and are not really anxious to move out of familiar surroundings. Having the chance to stay for a few months or a couple of years where they can then take their time to find their new place might be easier than you think.
Retiring OUT of the city and away from the school taxes and other costs is easier than you think. Worried about being too far away from medical facilities is a myth.
First of all, there are very good medical facilities in small towns all around the USA. IF you need something really drastic- they will helicopter you anyway to the fancy places. Lots of states/counties have a plan that allows the person or family to buy Life-Flight insurance for a very reasonable price.
A couple I know lives in rural So Missouri. They have such insurance. It doesn’t matter if they pick you up once a year or every month. You will be issued a location ID number, and the copter will land in the nearest pasture it can. You will be at a hospital sooner under that plan than most cities with ‘ambulance’ service. The cost is less than $100 a year for both of them.
I became a real estate broker in 1974, same year I received a BS in Accounting and Real Estate. I was already in my second quarter as an MBA student. Try something else little one.
But to argue that, for everyone in every circumstance, it is always better to pay off completely (or even make accelerated payments on) an existing mortgage strikes me as completely wrong. The relevant cost-benefit calculations depend on many variables that are specific to the individual and, when done correctly, are very complicated.
Thank you for a logical and intelligent post! The question does not have just one answer and every situation is different.
Now you both are correct!! That is why I looked at it as to whether it should be the real question.
So, once again, you cannot back up your silly comments. I figured as much.
The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS http://www.amazon.com/Fair-Tax-Book-Saying-Goodbye/dp/0060875496/ref=sr_1_1?ie=UTF8&s=books&qid=1247677876&sr=8-1
Well, by silly, I meant stupid, and you are certainly guilty of that, as well as anti-American statements, and a LOT of anti-capitalist drivel.
Why do you hate America and capitalism?
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