Today TaxMama hears from Anne in Minnesota with this question. “With a $10,000 CD maturing, am I better off paying down the $40,000 mortgage on my condo; or to reinvest in some other vehicle? I am almost 70 years old and do not have much more than an additional few thousand dollars saved for whenever I retire, which I have no plans of doing.”
I can understand the temptation to pay down your mortgage. And since anything you invest in will probably not pay as much as the interest on your mortgage loan, it’s even more tempting. So let’s look at your benefit from doing that.
1) You pay less interest on your mortgage overall.
2) You effectively earn an extra percent or two or three on your money. On $10,000 that could be worth as much as $300 per year. That’s enough to pay for dinner for two at a modestly priced restaurant each month.
1) Your mortgage payment does not go down. So you don’t really get the extra $300 in your pocket for the year.
2) If you need money in an emergency, at your age, in this bizarre banking economy, it’s not going to be easy to get a loan, even against a home with a great deal of equity.
What would I do at your age?
If I were on a fixed income with no prospects of the income increasing, I’d stay liquid. I’d rather have access to my money more quickly and easily, than reduce a mortgage, without reducing the monthly payment.
Of course, when I reach your age, I expect to still be productive and earning money, like you. In that case, I’d pay off the mortgage in full as soon as I could. But I would do it all off in one lump sum so the payments stop entirely.
In the meantime, I would increase my monthly payment, so the loan pays off more quickly. In fact, that’s what we’re doing. As a result, our 30-year mortgage will be paid off in about 17 years.
What would I do with the savings, though? Like you, I’d probably keep it in something insured, providing a fixed rate of return – or Blue Chip stocks. Although the market is improving, mutual funds are still surprisingly volatile, considering they are managed by ‘experts’ getting paid really well to stay informed about their investment choices.
You might consider speaking with a financial advisor to see if you can get a higher rate of return somewhere, with security. Or stick with what you know and be safe. Take care of yourself – and enjoy every day.
And remember, you can find answers to all kinds of questions about using money and other tax issues, free. Where? Where else? At TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
Disclaimer: TaxMama does not offer specific investment advice. That’s what stockbrokers and Certified Financial Planners do.
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