Are you looking for peace of mind and significantly improved monthly cash flow? This could be a great time to pay down or pay off your mortgage.
There is a certain sense of euphoria that comes with paying off a mortgage, or making the last payment on a car loan. Your monthly expenses drop significantly, and you now have cash flow for savings, spending, or maybe working just a little bit less.
Retirement is much more achievable if you own your own home.
Let’s look at some different options for “safe money.” 30-year fixed mortgages average about 3.9% in the greater Philadelphia area, according to BankRate.com. Meanwhile, current rates for 1-yr CD’s average 0.27%. Five-year U.S. Treasury bonds yield 1.5%. Five-year fixed annuities pay about 2.5%, depending on the issuer.
Comparatively speaking, you may be paying a higher rate on your mortgage than you are receiving from some of your investment holdings. Carrying a mortgage does offer a tax deduction on the interest paid each year. However, this tends to decline over time, and may be reduced further if you are subject to AMT (Alternative Minimum Tax). Depending on your situation, it may be possible to obtain a greater tax benefit by paying off a mortgage, and increasing monthly contributions to a 401(k) or other retirement plan.
This all suggests that owning low-rate bonds and CDs might not always make sense, particularly if you still have a mortgage.
Keep in mind that it is always good to have a small nest egg available to cover life’s surprises, but if you want real stability and security, it may also makes sense to own the roof over your head.
-Jim Lee, CFA, CMT, CFP
Disclosure: Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Consult your advisor.