Q: I found a way to pay off our mortgage in 5 years. At that time, I’ll be 58 and my partner will be 52.
However, some of our friends have told us that it’s not a good idea to have your mortgage paid off as I will lose the tax deduction from the interest. Our current mortgage is $76,000 at 6.35 percent and would have been paid off in 2011.
We have now taken a home equity loan (no closing costs or fees) for that amount at 4.25 percent for 5 years. Our payment has jumped almost $400 per month but we can easily afford that increase, especially since it’s only for 5 years. Other than this mortgage, we only have a truck payment of $300 per month and no credit card debt. Our total yearly income is $100,000 combined.
Did we do the right thing by paying off the house so soon? Our banker said he would offer us tax deferred annuities when our home equity loan is paid off. Do you have any other suggestions to shelter the money at that time?
A: There are two ways of thinking about this.
Here’s the first: Money is cheap right now. When are you going to be able to borrow at 4, 5, or 6 percent again? If history is our guide, it could be another 40 years from now. Surely, you’ll be able to find an investment that will return more than you have to pay for the money.
If you buy into this scenario, then the obvious choice is to borrow as much as you can on a 30-year loan, maximize your tax break and use the money to make investments in other places.
On the other hand, there are people who feel there is a value to being debt free, particularly as you’re entering the years when you may want to retire, and your cash flow is going to be less than the healthy salary you and your partner currently enjoy.
If you pay off your mortgage in five years, you and your partner will be able, in your final working years, to plunk every dime you’ve been spending on your mortgage into your retirement savings. That can add up rather quickly, particularly since you don’t carry other debt.
Whether you go with a maximum mortgage, no mortgage or somewhere in between depends greatly on your comfort level with debt. Personally, I think paying off your home loan is a good thing. It means every dollar you prepay earns 4 percent, or whatever the net interest rate is that your mortgage or home equity loan carries.
I don’t know of another investment that will give you that guaranteed return these days.
As for what to do with your cash after your home is paid off, you could consider an annuity (tread carefully here, because most annuities just make money for the person selling them), or you could salt away the cash in a Roth IRA (you and your partner each qualify to put away $3,500 currently), while putting any remaining cash into a diversified portfolio of stocks and bonds.
If you’d like additional advice on creating the kind of diversified portfolio that will allow you to maximize your gains and tax savings, spend a few hundred dollars to work with a fee-only financial advisor (888-FEE-ONLY).
Published: Feb 29, 2001