Getting Personal
When to pay off mortgage
Question: Given today's low returns on money market accounts and CDs, is now a good time to pay off one's mortgage? I am about 1/2 way through my 15-year, 4.875%, fixed-rate mortgage and plan to keep the house. The mortgage balance is $110,000. I have been "maxing out" my 401K for the last 18 years and am fortunate enough to work for a company that will provide a defined benefit pension. I have low expenses, no debt other than this mortgage and an income that allows me to save several thousand after-tax dollars each month. I have $250,000, after tax, in a money market account -- more than enough for emergencies.
I am thinking of using $110,000 of my after-tax cash to pay off my mortgage. Given the low returns on money market accounts and CDs, the argument for using extra cash to pay off debt, including mortgage debt, seems to warrant greater merit, right? Thank you very much, Carl (Currently working in Singapore), Alameda, CA
Answer: We've been getting a lot of questions about paying off the mortgage early and, while it isn't a financial mistake, I'm usually wary of the strategy. You'll see why in several previous postings. But I'm including your question as an example of when the strategy just might work.
You have a good-sized emergency fund, and after-tax savings. You're fully funding your retirement savings plan. You have a company pension to boot.You have no debt other than the mortgage. You are well-diversified with a great balance sheet. Wow.
I think there are only two issues to consider. First, are you going to stay in the home? Is this where you plan on living? It sounds like it, but if you were going to move shortly or desired a different house I'd probably just stick to the current mortgage payment schedule. Second, could you do better than 4.8% investing in the money in the market rather than paying off the mortgage? Of course, you don't know, but you might be able to. Still, in light of all the uncertainty in the economy and financial markets a 4.8% return on investment by getting rid of the mortgage and being debt-free seems really good to me.
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Comments (3)
January 9, 2009 6:59 AM PT
I was in approximately the same position about five years ago. At that time, I had about 10 years remaining left to work before retiring. I had a great long term job. I decided to pay off my mortgage (only about $50K remaining on it) with a loan from my 401K. Alhough many would advise against borrowing from the 401K, in my case the ratio of 401K balance to loan amount was about 8:1, which only affected about 12% of the entire account. As I paid off the loan in four years, the interest I paid went back into my account.
Regardless, whether this was the financially prudent thing to do or not, I am very glad I made this choice. Shortly after the loan was paid off I lost my job. I did not secure a job immediately and the peace of mind I had by not being pressured by a mortgage payment was priceless, which allowed me to take a part time, lower pay, lower stress job at a later date.
January 17, 2009 7:04 AM PT
I have discovered that the paying down your loan can result in being cash poor when a need or emergency arises. There is another way to do the same thing and not leave you cash poor. Use the same money you would use to pay down the loan and put it in high yielding cds, etc. Then you are not cash poor yet if you want to pay down the loan you can at any time.
January 20, 2009 10:46 AM PT
Only problem with putting it in high yielding cds, etc. is that their ain't no "hight" yielding CD's.