||Ask the Dollar Diva
When does it make sense to pay
off a home mortgage?
Dear Dollar Diva,
In your column, "Is
it wise to buy a car with cash?" you say that a person should
pay cash for a car if he has the money to do so. Would the same
apply to buying a house? Or paying down an existing mortgage on
a home somebody already owns?
Wouldn't it make more sense to take out a mortgage
and invest the cash? Especially since you can get a tax deduction
for the interest and real estate taxes.
Obviously, you would hope that the investment
return would be greater than the interest you're paying on the loan.
If you have a "cash mentality,"
and a heap of money, you'll like the idea of one day owning your
home free and clear. You don't get to deduct mortgage interest,
but you don't have to pay it either. And the money you're saving
on house payments can be used to fatten your investment portfolio.
But before you think about paying off your mortgage,
make sure you have all of your financial ducks in place. It's a
lot easier to give money to your lender when you're flush than it
is to get it back when you're needy. Here's the position you want
to be in:
- You have no other debt.
- You're making maximum contributions to your
tax-deferred retirement plans.
- You have enough cash in the bank to cover
emergencies, such as an extended period of unemployment or major
repairs on your home.
- You have a comfortable portfolio of stocks
and bonds working for you.
The Diva thinks everyone should strive to have
his home paid off by the time he retires, so if you're lucky enough
to have all of your financial ducks in place, go for it. You'll
find that a life without a monthly house payment is sweet, indeed.
-- Posted: April 9, 2001