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!
Do you want to answer the question i posed earlier in the thread, or continue on skirting the subject?
I’m simply trying to have you back up your position, which you always fail to do. I’ll give you this much, you sure are consistent. Consistently anti-capitalist.
Reminds me of an old saying:
“there are those who understand compounding interest.., and those who pay it”
My theory really did not have anything to do with the government raising taxes for their own coffers, but was meant to be an effort by the government to alleviate losses by the mortgage and finance companies due to inflationary pressures. 5% mortgage payments during 20% inflationary times results in lots of losses by the financial industry. Monetary value losses, not dollar quantity losses.
like Beck said today....maybe better to just live poor...pay no taxes ever.....and live like a king....
its the end of investment I think....unless you invest in a huge supply of trading goods.....maybe farm or timber land...
If you are a financial-market bear (and if you are, I completely understand), then buy gold (or gold-related stocks), rental housing (people have to live somewhere and you can get nice properties in many areas now at fire-sale prices), inflation-protected instruments like I-bonds or TIPS, take short positions on the S&P 500, etc. There are many places for even the biggest pessimist to place bets, but you have to take some type of risk to expect any reward.
pay off the mortgage if you have the money, especially if you can no longer write off the interest. if you have a 5.375% mortgage, you would have to have investments that yield over 7% if it is not tax sheltered (ira, 401k). And given the volatility of the stock and bond market, the peace of mind is worth more than the 2.5% to 3% historical return above what you might save. i say “might” because there is no guarantee.
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