Dear Big Move,
My husband is 66 and I am 61, we have a 30 year mortgage at 4.99% and a current balance of $306,000. We have several certificates of deposit totaling $90,000, and $100,000 in savings.
Our only debt is the mortgage. We own our cars and pay the full amount to our only credit card every month.
Does it make sense that we have all this cash, but we owe a lot on our mortgage?
The interest on the CD and cash each month is not equivalent to the value of the mortgage insurance. We are in the 22% income tax bracket.
Can you tell me what makes financial sense: pay off the mortgage or continue with CDs?
Weigh my options
'Big move” is a MarketWatch column examining the ins and outs of real estate, from searching for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next step should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Weight,
If by “mortgage insurance” you're referring to private mortgage insurance (PMI), it may make sense to pay enough toward your mortgage to eliminate this fee.
You can request the PMI to be removed if you have paid down the principal balance to 80% of the original value of your home. In theory, if you paid 10% on your $500,000 home, you would have to pay another $50,000 for mortgage insurance coverage, even though you only have $306,000 left in your balance.
This still leaves you with a cash reserve of $50,000 and your CDs untouched, which you can use in an emergency. You'll also save hundreds of dollars in interest payments by paying off your balance. Additionally, you can increase the equity you have in the home.
Clearing your money to pay off your mortgage is another route, but this requires more thought.
Although you are building more equity in your home and becoming less indebted, you also need to budget for any emergencies that may occur in the next five or ten years.
Do you have enough cash to fund any unexpected expenses? Will either of you see a decline in income that could impact your budget, since you're both at or near retirement age? Do you anticipate any sharp increases in home insurance costs or property taxes that could strain your finances? Will you have enough retirement savings?
Think back and plan for the future.
“What I find surprises retirees is that life still goes on when you retire. New windows, a new heating and air conditioning system may have to be installed — and these can cost tens and thousands of dollars,” Tanya Brown, certified financial planner and director of financial training at OfColor, told MarketWatch. .
Your monthly mortgage payments remain, even if you repay part of your loan
Even if you use all of your money to pay off part of your mortgage, you'll still have a balance, Brown added. “So, if you pay that down, your balance may go down, but your mortgage payment won't change,” she explained, even though you're paying it off sooner.
Also check if your lender charges you a fee for paying off your mortgage early. Sometimes there are prepayment penalties for doing this.
You have a mortgage interest rate of 4.99%, which is lower than the current 30-year rate. If your monthly costs are manageable, why rock the boat?
And if you pay enough off your mortgage to eliminate the fees, you'll see some interest earned through your savings, which could double over the next few years. You can also invest $100,000 in cash to get a higher return.
Alternatively, if there is no early repayment fee, you can make an extra payment here and there to pay off your mortgage faster. Brown also suggested that you shop around for CD prices that may be higher than what you get.
It's a very personal decision, but if you have such a large balance and are at or near retirement age, it may make sense to keep your money invested in CDs and pay enough to eliminate insurance fees.
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