We're trying to decide what makes more sense in todays economy and market. We have no recurring debt except our mortgage. Our CC are paid off each month.

Should we:

1. Pay off the house (only about 22k left).

or

2. Keep the money in the savings account.

This is a no brainer. Are you making more interest on your savings account than you are paying in interest on your mortgage? If so keep the savings, if not pay the loan.

well, I "get" that. It is what I want to do.

But I hesitate because of the current economic environment and wonder if it would be better to hang on to the cash "for a good safety cushion"?

If we paid off the mortgage, we'd be left with about 6 months income in the savings account. Is that considered a good cushion in todays environment?

(I think I'm being a worry wart about it...what I REALLY want to do is go buy an Allegro Bus...)

I vote for paying off the house, though I wondered if it has to be an "all or nothing" deal.

Can you accelerate your mortgage payments without touching the savings? If you did not put any more into savings right now (but didn't touch it either), could you pay more on the mortgage? The more that is paid out of present earnings, the less would need to come from savings. Plus, if your personal economic situation changes at some point, you still have the option to pay it off using savings.

Just some thoughts...

Brian

I don't know how many years you have left on your mortgage, but would assume that your down to just a few years. If so, MOST of what you are paying is going towards principal, not interest, correct?

Second, are you planning to sell or not in the near future.

If it were us, I'd leave the cash alone right now and finish paying off the mortgage it's current schedule, or if applicable, adding some each month to the principal to pay if off sooner.

Barb

There are other factors at work here. There is no simple answer.

- Are you in danger of loosing your income? If so, having more than 6 months living expenses would be a good idea.
- do you have other, readily available savings that are easily tapped without penalty if you do lose your income source?
- will you get a huge feeling of comfort without any debt? If so, it may be worth paying off the mortgage. It is not always JUST about the numbers.

I am a live debt free kind of guy, so you may be surprised by my answer to your question. In this case it sounds like paying off your home debt will totally deplete your savings. IMO, that is a bad idea. You should have liquid investments (savings or money market) sufficient to pay 4-6 months of living expenses.

Once your savings exceed the 4-6 months of living expenses amount, start aggressively paying down on the debt.

If opinions are what u are looking for, here is mine.
The interest on the house is deductible, course you have to have income to use it.

If you are paying 7%, say 7%, and you are getting 5% on your cash, then in effect, it only cost you 2% to keep the cash. For that I would keep the cash , as 2% on 22K is only 440.00 per year or less than 40 bucks per month to have the cash handy.

You must figure if the interest deduction is pertent to you, and if the 2% or whatever it is, is worth hving the money on hand.

If I were afraid of the economy,I would worry about other things than the 22K , Just my opinion and I promise it will be different than others.

Chuck:

Lots of smart people here and a lot of right answers. Which one is right for you is your choice.

Jacks answer: Huge feeling of comfort without a debt, is the proper one for me. We paid off our house and had no savings left, we both had steady income for a cushion for the what ifs.

It took two years of paying our selves the mortgage and the interest, to regain the lost savings, it was the most comforting feeling of being debt free.

Last like Art and Nancy, it made it very easy to stay debt free and have larger savings being generate.

Good luck, let us know what you decide.
Trucken.

All of you are right! I guess thats what makes the decision a bit difficult.

We do have a well-stocked 401k & IRAs and an aftertax account with a good bit of money. We do not touch that money, so do not take it into consideration when making daily financial decisions.

We will have 6 months $$ still in our regular savings even if we do pay off the house and income tax deductions are not an issue. So from the comments here it looks like a GO. 22K is not a whole lot of money (less than a new car costs), but it does add a bit to a "cushion".

Still, a potentially income-impacting event occurs next month. So, we will wait until then to decide. (Either way I think we will still pay the house off, but caution wins out for now.)


Thanks for all your comments - it is reassuring to know my thought processes align with yours!

I'd remortgage the house.

Let's say for example sake the mortgage interest write off and the tax on interest is a wash.

Let's say you took out $225k at 5.5% mortgage rate. Your total payback at the end of 30 years would be $460k.

Now let's say you take the 225k and put it in CD's at a meager 3.5% (which we know will go up in the future), but at 3.5% the total after 30 years would be $631K. Basically you would make $170K for doing nothing. Using an average of 4.5% you're looking at $842k or $382K for doing nothing but having the money work, PLUS you have the added value of the house.

Well you say, I'm older and don't have that kind of time. Well at 15 years you would have paid $386k in mortgage and interest OR have $435K in CD's or $49K for doing nothing.

To recap using the number $225k and let's say the house appreciates to $275K over 30 years.

You pay off your house and you have all the equity doing nothing, going up and down with the housing market. After thirty years your home investment is worth $275K.

I mortgage the same $225 out of the house at 5.5% mortgage rate and get a LOW ball number of 3.5% for a CD investment. After thirty years I would have paid $460K in principal and interest. The investment would have grown to 631K or a net result of $171k, BUT WAIT I now have a paid off house worth $275.


Your result $275K
My result $446K

Using an average interest of 4.5 as we all know it won't stay at 3.5% for thirty years.

My result increases to $667k vs your $275K

Which would you rather have?

It's be a long psychological thing to pay off your house, when it has always been the wrong thing to do. Especially now when you can get a low mortgage rate.

I repectfully disagree with the post that Walt has made.

One issue is that even using his analysis, the approximate break even is around 13 years. Some would not be interested in living in the house to reach break even.

My other issue, and perhaps the more serious one, is that Walt fails to account for the situation where the homeowner pays off the mtg and then begins to save the monthly mortgage payment. If the owner saves 1277. monthly/15,300 yearly/459,000/30 years, pre interest and compounding and that amount is compounded over 30 years at 3.5% I believe the numbers would favor paying off the mortgage, and the owner is always ahead without having a breakeven year.

Last but certainly not least, its very hard to predict the future beyond a 5 year time frame, and Walt's analysis doesnt consider a change in plans 5 years into the decision.

Hi Walt,

Your numbers look good on paper but I have serious doubts about how they'd play out in the real world.

I have a hard time not thinking that inflation will take the wind out of these sails and ending the 30 years (or 15) with either a wash or a loss.

CDs, as the choice of investment, work pretty well for many as they do grow. But I haven't seen them as a "better than inflation" type of investment over the long term. In my opinion, they're a wash at best and a small gradual loss being more typical when looking at real dollars.

And besides, I doubt they'd really want that $1277/mo house note to pay every month.

Just my opinion, others will disagree...

No offense intended.

Brian

Walt,
Help me with the logic.

I agree, if you put the $225,000 in CDs at 3.5% and can let it grow for 30 years it will become $632,000.

However you still need to make monthly payments on the home and it needs to come from somewhere. If you take the $15,330 annual mortgage ($225k loan, 30 years, at 5.5%) from the CD balance, you will run out of the CD principal and interest by year 22. You probably should consider a declining balance on the CD principal and interest to be fair in the equation.

OK, so you say...let the CD money ride but you still need to take the mortgage from somewhere and therefore consider the negative growth ramifications of the other source of cash.

Rick - to pay off the house the have already lived there for 15- 30 years. Many people live in a house for a life time.

Most people don't have the discipline to put that 1500 a month away. Out of all my friends who paid off their house, not a single one puts their same mortgage payment away. Their level of lifestyle rose, better cars, better vactions all because they can afford it.

Brian I used CD's and a low rate to give a worst case scenario.

MB here is the logic. You are currently paying a note from somewhere, usually wages at this point. Thus, you continue paying from your current source, not the CD balance. As you need the power of compounding. There is no negative growth ramification, that money is paying off the new mortgage gaining equity and giving a tax write off.

Then there is the added safety of limited exposure in case of natural disaster and the insurance company balks, such was the case during Katrina and others.

This doesn't fit everyone, just another way to look at the same equation.

If you have the discipline to put that mortgage payment away each month, then go for it. I haven't found a single person that I know who couldn't help dipping into it. I have a few friends who went out and bought BMW's and Cadillacs right after they paid off their homes, because the could afford it.