No more mortgage payments! Sounds like
the ultimate in financial freedom, but it may not be the wisest
move for everyone, say Bankrate financial experts Dr. Don and the
Dollar Diva. Below, our experts answer a few frequently asked questions
regarding the pros and cons of living mortgage free.
When does it make
sense to pay off a home mortgage?
Paying off a mortgage is a good idea when
you have a lot of money, a stable income stream, and a nice portfolio
of securities working for you.
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
- You have enough cash in the bank to cover emergencies,
such as an extended period of unemployment or major repairs on
- You have a comfortable portfolio of stocks
and bonds working for you.
Remember, you don't have to pay off the whole mortgage
at one time. You can gradually reduce the principal by increasing
your monthly payments. You should be able to prepay without a penalty,
but it's always a good idea to check with your lender just to be
sure. The Diva thinks everyone should strive to have their home
paid off by retirement. So, if you have all your financial ducks
in a row, go for it.
-- answered by the Dollar Diva
What's the wiser move to make with an inheritance:
Invest it or use it to pay off a mortgage?
Let's say the inheritance is $205,000 and so
is your mortgage balance. Let's also say that you have a 30-year
fixed-rate mortgage at 8 percent, with a payment of $1,500 per month
and a full 30 years to run. If you keep the mortgage, you'll pay
a total of $540,000 with $335,000 of that being mortgage interest
expense. The interest expense will save you about $110,550 in federal
income taxes (at the 33 percent marginal tax rate). You can invest
the $205,000 and it will be worth about $2,242,000 30 years from
now, assuming an 8 percent annual after-tax return, compounded monthly.
If you pay off the balance and invest $1,500 monthly,
at the end of 30 years the investment will be worth about $2,250,000;
again, assuming an 8 percent annual after-tax return, compounded
monthly. But you'll have paid an additional $110,550 in federal
income tax over the years due to the loss of the mortgage interest
The portfolio values are close enough that the decision
really hangs on the tax benefit. The portfolios are $8,000 apart,
and most of that difference is attributable to rounding. I'd choose
to invest the lump sum. It gives you financial flexibility that
you may need down the road, and allows you to keep the tax deduction.
The tax savings could be invested over the years to add to the value
of the portfolio. Assuming that you'd receive the same tax benefit
each year, invest that at 8 percent after-tax, compounded annually,
and the tax savings are worth $417,000 at the end of 30 years.
Ending portfolio value
Pay off mortgage and invest
Keep mortgage and invest
-- answered by Dr. Don
Is signing up for a biweekly mortgage program
a good way to pay off a mortgage quickly?
A biweekly mortgage isn't alchemy. Making 26
mortgage payments a year instead of 12 monthly payments forces you
to pay an amount equal to an extra monthly mortgage payment every
year. You don't need the bi-saver plan to accomplish this feat since
you can do it on your own by making additional principal payments
each month equal to 1/12 of a mortgage payment. I recommend that
you use the money you'll pay to participate in a biweekly program
to make an additional principal payment and pass on the opportunity
to participate in the bi-save plan. Either way you'll pay down your
mortgage faster and pay less in interest over the life of your loan
than if you didn't take these steps. This biweekly mortgage calculator
can help you determine the interest savings and how much time you
shave off the loan term. But the bi-saver plan won't cut your loan
term in half.
-- answered by Dr. Don