Keep the mortgage or pay off the house?
|
|
|
|
Don't mess with your 401(k), part II
Taking out a lump sum from your 401(k) to pay off a
mortgage is a particularly bad idea.
A couple with $50,000 in taxable income who pulls
$100,000 out of their 401(k) plans to pay off the mortgage plus enough
to pay off the additional taxes will reduce their 401(k) savings
by at least $135,000. That's assuming they are older than 59½ so there
are no penalties.
Withdrawing from a retirement plan to pay
down a mortgage when the retirement plan is 100 percent taxable upon distribution
is a lousy idea, says Robert Fragasso, president of The Fragasso Group in Pittsburgh.
"That money is taxed at the individual's highest bracket.
You're paying an exorbitant cost to free up money."
The
pros of paying off your mortgage
All that said, it's not a bad idea
to pay off your mortgage prematurely. If you can swing adding an extra payment
every month toward the principal without sacrificing your retirement savings,
that might be the ideal approach. Use Bankrate's mortgage
calculator to determine how making extra payments to the principal can shorten
the term of your mortgage.
 |
5 reasons a mortgage burning makes sense: |
|
|
|
|
You
can get more from a reverse mortgage. If a reverse mortgage is your financial
fallback position and you owe money on the property, you must take at least that
amount as a lump sum advance at closing and use it to pay off your debt at that
time. Therefore, having a paid-off mortgage increases the amount of cash available
to you in a single lump sum, credit line or monthly advance.
You
leave more to your heirs. If you want to leave the house to your children
or someone else who doesn't have a lot of resources, do them a favor and pay off
the mortgage. Otherwise, they maybe faced with selling the house whether they
want to or not.
You
protect yourself from suit. In many states, if you're sued, your home is
exempt from judgment. Owning your home outright also can provide some protection
from bankruptcy. "One hopes sheltering assets in your home will never pay off,
but it's something to consider," says Garrett.
Make
a sure bet. Gillette Edmunds, author of "Retire on the House," a book about
real estate investing, pooh-poohs the notion that it is smarter to keep a mortgage
and invest at a higher interest rate. "The problem is that mortgage interest is
a sure thing and the investment isn't," he says. "You could lose everything you
invested and still have to pay the mortgage."
Peace
of mind. For many people, paying off the mortgage has intangible advantages.
"You would never believe how fabulous and freeing it feels to pay off a mortgage,"
Garrett says. "The psychological benefits are enormous."
|
