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No. of Recommendations: 3
>> I now have enough to pay off my house which is worth roughly $300,000, but most of my savings would be depleted. I have a 20 year mortgate @ 6.625% with about 17 years remaining. I have been making additional payments of $100 per month towards principle. Although I have been making some good gains the past two years in the market, I wonder if it makes more sense to pay off the house or keep investing? I know my luck won't hold out forever in the market, whereas I will have a certain peace of mind being debt free. I am married with no children, I am 42 and my wife is 39. I am currently contributing to a 401K and a Roth IRA. I fully realize that I will lose the tax benefits if my house is paid off. Any suggestions? <<

You talk about "savings," but is this savings invested? If so, you'd have capital gains taxes on the sale. That affects what I would personally do.

In either case, I'd refinance to a 15-year fixed mortgage at around 4.75% to 5.00% these days. If your credit is good there's no reason to still be paying 6 5/8% interest. I'd invest the extra cash flow each month which results from the reduced interest payments. (At 6.625% I can see aggressively paying down the debt; at 4.75% I think it's a little less compelling.)

If the "savings" you talk about is invested, I'd not touch it to pay down the mortgage. Long term you'll do better in the market, and you can keep deferring taxes on the gains. Plus I'd make sure I had several months of living expenses in a liquid savings account, money market fund or similar instrument that protects capital.

If it's merely "savings" (not invested in a way that requires selling securities and triggering a taxable event), I might consider paying down the mortgage balance a bit upon refinance, making sure I have enough in savings for emergencies.

Having said all that, if you really don't want to refinance, at 6.625% I would pay it down more aggressively, yes, consistent with not pulling out investments that incur cap gains taxes and consistent with maintaining an emergency fund.

Finally, as for the tax deduction, just remember that you have to pay a dollar in order to get 25 to 40 cents back (depending on the state and your tax bracket). Why not keep that 60-75 cents in *your* pocket?

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