August 30, 2010 in Debt

Use savings in CDs to pay off house?

Dear Debt Adviser,

My question is whether or not to pay off my house. It would wipe out my CDs. I have an emergency fund of $2,000. Is this a good idea? I live fine on my Social Security income.

— Sharon

Dear Sharon,

My take is that if your Social Security income allows you to live comfortably while making your mortgage payment, my answer to your question is, no, don’t pay off your house. You don’t say why you want to, but I would recommend keeping your savings in certificates of deposit, or CDs, intact rather than using them to pay off your mortgage early. I have found that life has a way of sending us the unexpected — some good and some bad — as we get older. Using all your CDs would leave you vulnerable if your $2,000 emergency fund were all you had to fall back on. The money you have saved may help you better manage any unanticipated expenses or opportunities that might be headed your way.

The Debt Adviser’s quick tips:
  • Don’t pay off your mortgage.
  • Consider a CFP for a plan.
  • Look into a reverse mortgage.

With that said, since you are considering some financial matters, I suggest that you try to get an overall perspective of where you are, where you want to be and what to do with the answer. For this I recommend a really good financial planner. The minimum credential I’d look for when searching for someone is a Certified Financial Planner, or CFP, designation.

If you have a sizable nest egg, you might consider shopping for a Certified Financial Analyst, or CFA, designation in addition to the CFP. A CFA is highly trained in investment instruments and can advise you on specific opportunities. A CFP can give you an overall plan and structure within which to work. I believe a financial plan is the most important factor for you to begin with at this time. A thorough review of your financial situation by an experienced planner will give you peace of mind that you are doing everything you can to take care of your financial future while allowing you to spend your money with the confidence that you have all your bases covered.

If your nest egg is small and you are just uncomfortable with a mortgage hanging over your head, I suggest that you also consider looking into a reverse mortgage. Reverse mortgages can be a great way to eliminate mortgage payments and possibly give you access to the equity in your home without the risk of ever having to pay it back as long as you live in the home. This could free up money for travel, pets, church, family or whatever you like.

I am also thrilled to hear that you have an emergency savings fund. What I encourage you to do is to keep adding to it when you have a windfall. For employed people, I suggest emergency savings of six to twelve months’ of living expenses. Notice I said expenses, not income. For retired people, because you don’t have to worry about losing your income source, that number can be less, depending on what you are comfortable with. These savings should be liquid like in a savings account and kept separate from your money in certificates of deposit, just as you have done. You would tap the emergency fund for needs such as replacing the washing machine when it breaks or handling any other unexpected expenses that arise.

For expenses you know are coming, I suggest you add to your CD hoard so the money will be available when it’s needed: for example, saving for a car down payment two years from now. If you are considering paying off your mortgage because of a high interest rate, I suggest that you look into refinancing your mortgage. Rates are very low right now and a refinanced mortgage could be either a much smaller payment or the same payment with a nice addition to your CDs.

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