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!
However, even assuming a $300000 mortage the payments would be nowhere near your figures. Math first finance afterwards?
Oh, OK. Sorry if I was touchy.
That will work as long as you have some guaranteed source of cheap dollars in the future. If you are relying on savings to generate those cheap dollars, remember that your savings base relatively shrinks with inflation. The economy at that time might not employ you, so living off your savings will get rid of them faster then.
It IS something....
I understand the inflationary aspects of paying a mortgage with future dollars of less value. However, with todays environment involving the government cancelling and re-writing existing contracts, ala GM and Chrysler bondholders, I can see them doing the same for existing mortgages with interst rates below the rate of inflation.
They, the government, have shown they will obviously protect and enhance the coffers of the financial industry.
I know, I know, people would squeal and raise heck, but look what they have done in just six months. Just imagine, monthly mortgage payments going from a thousand bucks @ 5% to fifteen hundred @ 8%. Wow, an adjustable rate mortgage you didn’t sign up for. All for the good of the economy to prevent its collapse. Now where have we heard that before?
If you buy in at 270.00 an ounce and cash out at 980.00 an ounce that’s called a profit.
Wise advice that I wish I would have heeded ten years ago...but ten years ago they were saying to NOT pay it off because of the interest deduction. *sigh*
Then again who would have thought we were heading for a CommieNation that was out to grab all the money as fast as possible?
I am a conservative, I do not believe in social engineering with taxes. Maybe liberals and republicans do.
I don’t think it was ever a social engineering thing in the first place. Perhaps if mortgage interest were singled out for deductibility you’d have a point, but that wasn’t the case. I believe the thinking was that a loan was a zero value paper transaction and logically shouldn’t be producing taxes at all. Thus if interest income was going to be taxable, revenue neutrality would require that payment of interest be deductible. That makes more sense to me than having both interest receipts and payments off books. Obviously, having it on books when it generates a tax bill and off books when it would be deductible is a government scam to give those creeps more of OUR money.
Maybe the definition will help.
Cute, but would tyou care to post something relevant next time to back up your socialist assertions?
Better than you deserve!
The other advantage of paying off your home is that the income you need from that nest egg in order to live goes down dramatically, meaning you don’t have to make more interest on the nest egg to offset the interest you pay on the mortgage.
Duh, i know what social engineering is. It doesn’t apply to your post, so how about answering my original question? It would be a first, as you really suck at answering tough questions like “Will you back up your assertions?”
OK, i’ll be completely fair, and retract the “socialist” comment and replace it with “anti-capitalist”.
With your line of thinking unearned appreciation would also be taxable. My thinking is earning of interest off of secured government bank insured savings should not be taxable. What is the treatment under the fair tax plan???http://www.usnews.com/blogs/the-home-front/2009/02/25/5-beefs-with-the-home-mortgage-interest-deduction.html
No with you it is all ways your BS statement.
IMO, pay off the mortgage and put her C/D in a money market instead.
Pinging not for the original article, but for the discussion that follows.
An ardent desire to pay off my mortgage with my 401K is only cooled by the notion of the tax bracket+penalties I would incure. But oh dayyum how I wanna shrug off the worry of defaulting due to reduced income and impending future tax increases.
I will try to hold out till at least next year, when the kissoff payments from my former employer can’t affect 2010’s income filing.
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