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!
Let’s assume her mortgage payment is $1500 a month and she pays it for the next 2 years waiting for the inflation spike you mention-
that’s $36K down the drain - she’ll pay $30K to the bank to avoid paying $6K to the govt in taxes
That 30K could be going into investing at the firesale prices of equities in this market, or just be a sure bet build up of her existing cash savings.
People also forget to factor in the standard deduction. A couple years ago my situation wrt mortgage interest, state taxes, and so on, was that by itemizing I would end up with a couple hundred more dollars in deductions than if I took the standard. So if I had paid off my house that year, it would have cost me say $200 in deductions and $60 in taxes, while saving $6000 in interest and several hours working on the deductions. Dave never seems to mention this point on the air and I think it would make it truly a no-brainer for a lot of people if he did.
No kidding. And if the person in question is near retirement, they probably have very little interest to deduct anyway, since it gets front-loaded in most cases. If they are in year 20 of a 30 year, it mostly principal.
Not much thought on this one IMO. Pay it off.
Sorry, there’s no convincing me that holding on to a mortgage for a tax benefit is a good idea. I’m debt-free except my home, and I’m dumping scads of cash into that as quick as I can. I’d rather take my $1000 a month and dump it into a mutual fund.
On the other hand, if the currency does indeed collapse in the classic Wiemar fashion under O’bungler, and you have paper saying you own your house for a given amount of the now worthless script - then you get your home for what you already have in it basically.
Not that that will be a huge comfort.
But then I don't have 20-30 years to wait for the historical averages of “buy and hold” to show a return
While you're at it, invest enough to generate enough interest to pay property taxes indefinitely.
Proverbs 22:26-27 - Do not be a man who strikes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you.
Own your home outright. Insofar as you "rent" the property from the government via taxes, ensure you will always have enough to pay those taxes. Then it's yours, and short of eminent domain none can take it from you.
Actually, that's not true. Don't forget, interest is income to the one receiving it, and ALL interest, including cars, credit cards, etc. used to be deductible. I'll grant you that made more sense than the way it is now, but I disagree that interest in general shouldn't be deductible unless receipt of interest is non-taxable.
“Imagine not having a mortgage payment and having that money to save spend or invest ...”
Well, if you have paid off the mortgage then you don’t have the money you used to do that for spending or investing. I certainly wouldn’t take out a mortgage just for the tax deduction - that’s letting the tail wag the dog - but the tax aspect is one aspect of the decision to consider, along with “peace of mind,” expected return on alternative uses of funds, etc.
What about the lost interest on her cds the principle of which she would have to cah in to pay down her mortage and the loss of her tax deduction.
I agree.
Folks forget to factor in opportunity cost.
When I downsized houses I pulled out $200k @ 5% fixed for 30 yrs.
This looks like a late 70s/early 80s replay to me.
“and the loss of her tax deduction.”
She could still give to charity, therefore getting the same deductions.
This is called arbitrage. You make more than the cost of investing. Why pay off the mortgage?
You did read that I said that was only a hypothetical, right? That this is what I would do if the ratio were 1:1 and not 3:1?
If you physically have the gold, where do you store it so it is safe? If you do not have physical possession, who do you trust with keeping it safe?
I am not a sophisticated investor so I believe I am vulnerable to con men when it comes to gold. Perhaps you found an honest broker.
Now let us say the worse thing comes about, the economy collapses. you are sitting pretty on all your gold. Where are you going to spend it? If you find someone to take it in trade, how long will it be before everyone and their brother knows you have a stockpile of gold? How many are you prepared to kill to protect your gold?
A condo is not a house. Here not only does the government “own” your condo, but so does the condo association. Perhaps for you that was a bad decision. However that does not mean everyone that paid off their home has made a bad decision.
I wish you luck with your gold. I believe it gives you comfort today but gold is a risk the same as any investment even if you don't admit it to yourself.
I didn't say that. The tax deductibility of mortgage interest is only one of many factors to consider, along with “peace of mind,” expected return on alternative uses of funds, etc. 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.
Time to stop digging. Donations to charity diminishes her principle which would be contrary to her obvious goals.
Last year was the first time my federal standard deduction exceeded my itemized deduction. So, I currently am not benifiting one bit from having mortgage interest to deduct. Something else to consider...it may be time to pay off the mortgage.
I’m sure someone could run the numbers but off the top of my head, estimating a $1500 mortage payment
by cashing in $100K in 3% CD’s - she’d lose $1950 after tax in interest, and owe $6K more in fed tax
With no mortgage payment, she’d have $18,000 more income per year to save spend or invest, perhaps avoiding the need to cash out her other other CD’s to boost her income in an emergency or just to enjoy life
Would it be worth cashing in a $100K 2% interest CD to boost your annual income by $18,000?
Bump for later; I’m off to sell trees! :)
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