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!
All bets are off if the government decides that interest deductions for homes are benefits of the “rich” and puts a stop to the practice.
“tax deductible interest”
LOL! Like it makes sense to spend $2000 a month to get a $500 a month tax deduction - d’oh
Imagine not having a mortgage payment and having that money to save spend or invest ... not to mention the peace of mind
In the ‘Bama economy, the only thing that will have value will be property, especially gold and realty. Soon, greenbacks will have no value at all, so spending them while they do makes sense.
If they do away with mortgage deductions, I will seriously consider cashing my IRAs and 401ks and paying off the mortgage.
New questions need to be asked: Are you black, or a person of color? Are you a Democrat? Do you belong or work for any non-profit organization (e.g., ACORN, ACLU, etc.). Do you post on web sites? Are you conservative? Republican?......etc.
Depending on the answers, the advice would be drastically different.
One other point to consider - and this involves a degree of uncertainty. If your mortgage is long (30 or so) remember if inflation does indeed kick in you will be paying back that loan with inflated cheep dollars as opposed to the sounder ones you originated with. This is in effect doing to your mortgage what the government will do to the debt it is creating today...inflate it away.
Never should have been a deductions to start with.
I myself am betting on 1970’s-caliber inflation and interest rates. I’d hang on to the CD for now and re-invest it in a couple of years at 10 or 12 percent, then when that matures reinvest it at 18 or 20 percent.
IIRC, ALL medical was deductible and credit card interest.
I paid off the home mortgage the first chance I got, but I can understand why people choose to leave it out there. To me the more important goal should be putting yourself into the position to have the CHOICE to pay it off or not.
The actual choice you make may be a matter of taste or a flip of the financial market coin, but having savings on hand is truly valuable.
And they further crash the housing market. The policy should never have been enacted but since it has contributed to the increase in home values taking it away not only reduces asset wealth it dampens demand for future home purchases....
That’s part of why the economy will NEVER recover with this crew in charge.
Everyone’s afraid to make any moves because they could lose their shirt on the next 0bamanomics dictate.
I’ve rather been counting on inflation to happen fairly soon.
I have some investments under debt that I can pay off with the future “cheap dollars”. If it doesn’t happen, though, they’re still good investments, just not AS good.
Bzzzzzt! Wrong answer. If you have a CD (not in an IRA) you have to pay taxes on the interest. Thus at that same 35% tax bracket, the 3% interest is only worth 1.95%. Now compare that to the 3.3% effective after deduction rate for the mortgage.
Before the end of his term, Obama will be defining the word “rich” as someone who still has some money in his wallet a week after payday.
The mortgage deduction isn’t the only potential ‘cash cow’ that he could tap...the tax deferred status of 401(k) accounts could also be confiscated “for the children.” And after that, expect ACORN goons to come around asking for donations “for the disadvantaged,” and hinting at all sorts of calamities that could befall those who won’t “dig deep for the poor.”
This guy Obama is Comrade Chavez in a well-tailored suit. Pray for the Republic.
I paid off my mortgage last year.
A couple of months ago I got sh*tcanned at work (after 15 years).
That's several hundred dollars I don't have to worry about shelling out each month.
You never really “own” your home. You are just renting it from the government. They call the rent “property tax” but failure to pay will get you evicted the same if you were not paying on a rental unit.
The only difference is you get to pay all the insurance and maintenance cost of this “rental”.
Having said that, I think it is still a wise decision to pay off your mortgage.
My property tax is around $110 a month. Less than the cheapest apartment and as long as I can scrape up the money for the taxes each year, I have a place to live.
I like the Dave Ramsey approach
Savings yes- but set and reach a realistic goal (6 months expenses) - then PAY OFF DEBT
Once you’re debt free- savings grows fast!
This women would still have half a million after paying off her mortgage! Nice to be in that position
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