 Paying
off a mortgage early
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 Dear
Dr. Don,
My husband and I are both in our 40s, and are considering trying
to pay off our mortgage over the next three years. We both work
and have always had separate accounts. My husband is an adjunct
teacher at a local college and he never knows from semester to semester
how many classes he will have, so his income goes up and down. He
often stresses over our mortgage debt, which is around $75,000,
and is able to pay off his half right away with his savings. He
does not have any other retirement savings. I have a steadier job
and would be able to take on the full monthly payments. The standard
IRS deduction is higher than what we would get by itemizing.
I have an IRA for retirement. We have no other outstanding
debts. We also own vacant land which we might be able to sell for
$80,000 (we bought it 12 years ago for $8,000). We live in a highly
desirable area of the Southwest where the cost of real estate has
been increasing by leaps and bounds over the last 15 years. My question
is, should we work on paying off the mortgage and get this debt
monkey off of my husband's back by having my husband spend most
of his savings and hang onto our vacant land investment, or should
he hold onto his savings and we'll try to sell the vacant land to
pay down the mortgage?
Thanks,
-- Mo Mortgage
 Dear
Mo,
To use the mortgage interest deduction on your taxes, it has to
make sense to itemize. Since it doesn't in your case, the effective
interest rate on your mortgage isn't adjusted to include the deduction.
For illustrative purposes, let's say that the interest rate on your
mortgage is 6 percent. If you don't expect to earn more than 6 percent
after tax on your investments, and there's no prepayment penalty
on the loan, it can make sense to prepay the mortgage.
If you expect the value of the vacant land to continue
to appreciate more on an after-tax basis than the interest rate
on your mortgage, then it doesn't make sense to sell the land. That's
especially true if you plan on eventually retiring to that location
and you expect to build a home on that land.
Your husband could get out from under the mortgage
by prepaying his half. The problem with this approach is that the
monthly mortgage payment doesn't decrease; instead the loan gets
paid off sooner. You would then be responsible for the whole payment.
He's freed up money in his monthly spending but forced you to reallocate
your spending. The amortization function on Bankrate's mortgage
payment calculator
will show you how that changes when the loan gets paid off.
Refinancing half the mortgage would allow him to pay
off his half and for you to keep your half financed over the same
term as the current mortgage. That might not work for you, especially
if the interest rate on the new loan is higher than the old loan.
Taking on the closing costs associated with the refinancing should
be a shared burden, especially if you're going to pay a higher interest
rate. Mortgage lenders aren't doing handsprings to originate loans
under $50,000, so that may also limit your options.
The real key to all this is what he would do with
the money he frees up in his monthly spending. If it's going to
go toward savings or investments, that's one thing; if he's going
to spend it, that's another.
I don't see why you need to be mortgage-free in the
next three years when you are in your 40s. Getting the mortgage
paid off before you retire is one thing. Committing to paying down
$75,000 over the next three years is an ambitious goal. It may make
sense for your husband to use low-interest savings to pay off his
half of the mortgage, but since you don't have that money available,
you'll have to either refinance or continue making the full mortgage
payment over an abbreviated time horizon.
Your husband can tap his savings in the semesters
that he has a lighter teaching load, and that will free up some
financial slack in his monthly spending.
As a couple, you would benefit from hiring a financial
planner to take a big-picture view of your finances. An earlier
Dr. Don column
can help you with that decision. Between the vacant land and your
home, you have a lot of your wealth invested in real estate. Cashing
in savings and prepaying the mortgage would further concentrate
your wealth in real estate investments. While I don't know how your
IRA is invested, there seems to be a lack of diversification across
asset classes, and adding some stocks and bonds to the mix could
be a good idea.
To ask a question of Dr. Don, go
to the "Ask the Experts"
page, and select one of these topics: "financing a home,"
"saving & investing" or "money."
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