Dear Big Move,
My husband is 66 and I am 61, and we have a 30-year mortgage at 4.99% with a current balance of $ 306,000. We have several Certificate of Deposits totaling $ 90,000, and savings of $ 100,000.
Our only debt is the mortgage; we own our cars and pay our only credit card in full each month.
Does it make sense to have all this access to cash, but owe so much on our mortgage?
The interest of the CD and cash each month does not make as much as 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 the CDs?
Weighing my Options
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
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Dear Weighing,
If by “mortgage insurance” you’re referring to private mortgage insurance (PMI), then it may make sense to just pay enough of your mortgage to remove that fee.
You can request to remove PMI if you’ve paid down the principal balance to 80% of the original value of your home. Hypothetically speaking, if you had put down 10% for your $ 500,000 home, then you’d have to pay up another $ 50,000 to cover mortgage insurance, even though you’ve only got $ 306,000 left on your balance.
That still leaves you with a cash buffer of $ 50,000 and your CDs untouched, which you can dip into for emergencies. You’ll also save hundreds of dollars on interest payments by paying down your balance. Plus, you increase the equity you have in the home.
Wiping out your cash to pay off your mortgage is another path, but that requires more thought.
Even though you’re building more equity in your home and becoming less indebted, you also need to budget for any emergencies that could come up in the next 5 or 10 years.
Do you have enough cash to fund any unforeseen expenses? Would either of you see a dip in income that could eat into your budget, given that you are both at or near retirement age? Do you anticipate any sharp increases in home-insurance costs or property taxes that could strain your finances? And would you have enough left over in retirement savings?
Think backwards and plan forward.
“What I find catches retirees off guard is that life still continues when you retire. New windows may have to be put in, a new heating and air conditioning system — and those can cost tens upon thousands of dollars,” Tania Brown, a certified financial planner and director of financial coaching at OfColor, told MarketWatch.
Monthly mortgage payments remain, even if you pay off some of your loan
And even if you use all of your cash to pay down some of your mortgage, you’re still going to have a balance, Brown added. “So if you pay this off, your balance may get reduced, but the mortgage payment isn’t going to change,” she explained, even though you pay 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 so.
You have a 4.99% mortgage rate, which is lower than the current 30-year rate. If your monthly costs are manageable, why rock the boat?
And if you pay enough of your mortgage to remove the fee, you would see some interest being earned through your savings, which could compound over the next few years. You could also invest some of that $ 100,000 in cash to get a higher return.
Instead, if there is no fee for early repayment, you could make an extra payment here and there to pay off your mortgage faster. Brown also suggested that you shop around to get CD rates that could be higher than what you’re getting.
It’s a deeply personal decision, but if you have such a big balance and are at or near retirement age, it may make sense to keep your money invested in the CDs and pay enough to remove the insurance fee.
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