I retired in 2002 and in 2003 my previous company contacted me to "entice" me to come back and work for them for 2 years in Asia Pacific with all expenses paid and on an hourly contract which I did. I will be finishing up this contract and assignment at the end of this year. I currently have a home in Colorado that I bought after I retired, having sold my previous home and moving there, of which I owe approximately $120K on my mortgage. That mortgage is a 30 year mortgage at 5.25%. Now, I have accumulated quite a bit of cash savings in the past two years to where I can pay this mortgage off with no financial drain. I've read discussions before (Suzie Orman and others) who indicate this is the smart thing to do but I'm really wondering about this. I currently receive a monthly pension from my previous company (32 years of service when I retired...I'm 58 years old), to the extent that I need not work anymore and cannot spend what comes in every month as it is. My question is...should I pay this mortgage off? I also am sitting on about $750K in my IRA (401K rollover).Or should I park the cash stash (over $200K savings) into some conservative investments?Looking for some advice.Thanksruns50s
For you this is a judgement call, and your comfort level is a major factor, regardless of the numbers.Your mortgage rate is 5.25%. If it was much higher, I'd say yes, pay it off, or at least refinance it. If you were a point lower, and not with an ARM, I'd be inclined to keep the mortgage in place and invest the money elsewhere. I'd be scared to have an ARM these days though. Rates are going up and likely to keep doing so.By paying it off, you do two things:1. You have a locked-in guaranteed return of 5.25% on the principal paid off. Compared to whatever else you might have done with it, that may not be real exciting. But it beats government bonds, and who knows what the stock market will do?2. It eliminates the mortgage payment from your monthly budget. To most people at the stage they enter retirement mode, that can be a big deal psychologically, if nothing else.Really, it's your call.Bill
runs50s,I would never pay off the mortgage in your situation. Right now you can get something like 4.75 APR on a 5-year jumbo CD. Rates are likely to go up. Now, 4.75% compounded over 5 years is a little over 26% total return. This will be just enough to cover your (simple, not compounding!) mortgage interest over the same 5 years. If you then put the money in a new CD at the same or higher rate, you will get more in CD interest than you will have to pay in mortgage interest. Taxes are irrelevant because the mortgage interest deduction offsets your investment income. This is the power of compounding interest!Of course, this is a guaranteed way you can be better off not paying off your mortgage but rather investing the same money over 5 years. If you have enough income and savings elsewhere, you can try to increase your return by partially investing in stocks.Kirill
I would never pay off the mortgage in your situation. Right now you can get something like 4.75 APR on a 5-year jumbo CD. Rates are likely to go up.Um, I'm confused. The 5 year CD is 4.75%, his mortage is 5.25%. How woud he be making money by putting it in a CD instead of paying it off? True, you could say the mortage interest is tax deductible, but the CD interest is taxed, so that's a wash, not an advantage. He'd need an investment that's better then 5.25%, hopefully by a decent margin, to be a guaranteed advantage. Now, the market can return better than that on average, but there we get to the confort of risking it not doing so in his time frame, and his comfort level with the debt in general.
I would pay it off.Given the loan amount it is possible that you are receiving no or limited tax benefit from the interest payments. As the standard deduction increases each year, the tax value of the interest deduction decreases. It is a significant feeling of freedom to know that the mortgage company is out of your life. My mortgage was sold several times. One company every year "lost? the insurance information and tried to force us to pay for their "insurance". I have never regretted paying off our mortgages. Debra
DeltaOne81,Investment return is compounding; mortgage interest is simple.Kirill
Investment return is compounding; mortgage interest is simple.Sorry, I take it back. It's true, but irrelevant to the question of whether to pay off or not.Kirill
This will be just enough to cover your (simple, not compounding!) mortgage interestInterest is interest. There's no difference between "simple" and "compounding" interest.The only difference is whether you can earn the same rate of return on an investment in the future.Paying off your mortgage is the same as investing in an no-risk perpetual bond with a coupon the same as your interest rate (but that you can't sell). I'd argue that this interest does "compound": When you prepay on your principal, the amount of your future payments that goes to principal increases.But when you've paid off your mortgage, you can't make further investments into it.Still, you should make your cash allocation decisions based on what you believe will earn you the best long-term rate of return at a risk you're comfortable with.
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