Should You Pay Off Your Mortgage?
Let us say you have come into a sum, of money
, either from some retirement proceeds or a gift or bequest. You may be thinking about which is the best use for these funds, to pay down your home loan, or to invest them in an interest bearing investment.How do you make this decision, whether to pay off all or part of your home loan or to invest any monies you may receive?
The only way to make this choice is to sit down with a calculator and work out the numbers. If you received, for example, a lump sum of $5,000 upon retirement for your accrued vacation and sick days, you may be looking at the choice of putting it into a CD or using it to pay down part of your mortgage.
Mortgage calculators available on the web can tell you how much you have to pay on your mortgage, but let us just use an example of a 6.25% mortgage with a balance of $25,000 and five years to go. Using your $5,000 to pay some of the mortgage off would save you $100 per month, or a total savings over the course of the mortgage of $835.
In this same example, you can earn 2.5% on a CD, which would yield $657 over five years. In this example, the decision is easy: pay off the mortgage and pocket the $178. But what about the tax benefit you will give up from paying down part of your mortgage?
Plus, you pay taxes on any profit that you make from your investments. Oh, then better to keep the home loan and invest the money; no, if your income bracket is lowered due to retirement.
The savings from keeping the hokme loan won't mean as much to you now.
You also have to base your decision based on interest rates, since if rates were lower than 2.5%, your earnings would be lowered, so you can see that there is no hard and fast solution, but one that must be based on individual circumstances.
by: Kent S. Brown