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!
For some folks that's the only consideration. I own numerous properties, including a large residence, and not one with a mortgage. I'm the latest in a long line of penny pinchers. Debt stinks. A good night's sleep is one of my worst indulgences, and being debt-free makes for real good sleep!
Way agreed, you can recoup your CD money in 4 years while it would take 5.5 years to pay off at 2K a month. As far as the tax savings, you will not realize 6K off your taxes just off your gross income so even if you pay a little higher taxes it shouldn’t equal 6K.
On a 100K income with no other itemized deductions there is no extra tax savings because you would take the standard deduction.
Yes and I was adding supportive comments to yours. Sorry if that was not clear.
Yep. We finished paying ours last year. It sure feels good not to have that large check going out every month.
Your post makes no sense at all.If I didn’t invest into gold I would had never received the benefit of 300%+ gain so what’s your point?I don’t argue with math maybe you want to so count me out on your silly theories.
3 percent interest??? The top rate my bank is currently paying is 2.5% for a 60 month CD. This guy had half a mil locked up for five years!
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.
Best post I've read all year!
So you sold all your gold.
Good for you, you are a winner.
I’m sorry if my post was confusing. In order for a tax deduction to occur, the mortgage must exist. If the home is paid for, therefore no mortgage interest to deduct, the home owner can still donate money to charity, instead of interest to a bank. That will give them a new deduction.
Why pay $10K to a bank to avoid paying $3K to the government?
Mortgage just north of 5%? Pay it off? Depends, but I wouldn’t.
If people believe we are headed to much higher inflation due to Zero’s insane Spend and Borrow policies, it would make sense to keep the low interest mortgage, hold onto the cash, in expectation of getting nice fat juicy yields on CD or bonds later, rather than burning the cash now to invest at next to zero.
If inflation doesn’t go up, and rates stay as they are now, it would probably be better to pay it, and have the certainty of no debt.
If inflation kicks up, it would be really sweet having a 5% note, when you can get 10% or more on a CD. Furthermore, the mortgage balance will seem like peanuts if inflation is high for a few years.
I remember buying my first home in the early 80s, when mortgage and CD rates were north of 15%, and envying the old geezers with their tiny $20-40K mortgages that they were paying 4 or 5% on. I’ll bet when they bought the homes initially, a 50K mortgage seemed HUGE, but then inflation gradually ate away at the real size of the mortgage.
BTW How did you ascertain her marginal tax rate.
I reiterate time to stop digging.
Correct,I was the winner and it pays the bills and has allowed my family and I to move on to greater wealth.
There are times like now where cash is king. I hate and usually avoid cliches such as this, but this cliche couldn’t be more appropiate. One reason banks are reluctant to make mortages at the present time is to conserve their cash. Corporations are doing likewise in order to protect their viability.
her mortgage balance is $100K - we do not know her original mortgage amount or payment
all my examples were- as I stated and so state again- hypothetical
As I said, good for you. You took a risk and it worked out.
Having said that, it does not mean gold is for everyone. Gold has as much risk as any investment.
But what happens if/when the government changes deductions or IRS rules on mortgage interest? Tax deductions are a variable, not a constant. No mortgage, no worry about the government going nuts.
I’ll freely admit that I’m not a student of finance or economics, but I was raised in a family where every senior member owned EVERYTHING they had, including their homes, and they had plenty of nice things outside of them.
Yep. A few years back, our mortgage interested dropped below the threshold where it made sense to itemize. Now tax time is extremely easy for us since we just take the standard.
I believe that we should exempt food and shelter from all taxation.
I only had a few more years left on my mortgage; only owed $8000, with limited income now that I am retired -—— so I paid off my mortgage. Not sorry.
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