Pay Off Mortgage Loan With Low Interest Rate?

Added July 23, 2007 by Ilyce R. Glink

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Summary: When you have extra money is it better to pay off your mortgage or invest the money? It depends on the type of the mortgage loan and the interest rate on the mortgage loan. Paying off a mortgage may also depend on what stage of life you're in - whether you're still working or in retirement. In this case, Ilyce suggests waiting to pay off the mortgage loan because of its low interest rate.

Q: My husband took an early retirement in 2005, at the age of 56. At that time, we bought a business and moved to our current house. We have over $2 million in savings and investments.

When we bought our house, which cost $465,000, we took out a $200,000 interest-only mortgage at 4.75 percent. It's fixed for 5 years and then converts into a 1-year adjustable rate mortgage.

We used the $200,000 to finance our business and now the business is making some money.

Recently, my father-in-law passed away and we will inherit about $350,000. Do you think we should pay off our mortgage completely at this time or wait until 5 years is up?

We can earn about 5 percent interest on our CDs at our bank. In addition, we can claim mortgage interest against our income. We need your professional advice.

A: You and your husband sound like you're in great shape financially. You've obviously thought carefully about your future for a long time and have planned and saved accordingly.

Although you're now flush with cash, due in part to the unfortunate loss of your father-in-law, I wouldn't rush to pay off a loan with a 4.75 percent interest rate until the day before the loan is scheduled to adjust.

Keeping the mortgage will give you the maximum flexibility financially as well as a write-off, and allow you to find other investments that are paying better than 4.75 percent.

As long as you have at least $200,000 in something that will be liquid on the day you're ready to pay off your loan (which you could always refinance), you should feel free to take your cash and invest it in a way that makes sense with the rest of your financial portfolio.

You may wish to pay a fee-only financial planner to look over all of your substantial assets and see if there is a way to fine-tune for a greater return. Best of luck as you move into this new stage of your life.

July 23, 2007.

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