October 8, 2014 in Mortgages

Dear Dr. Don,
I’m 71 years old and on a fixed income. I owe $135,000 on my mortgage. I am wondering if it’s a good idea to take $30,000 from savings to pay down my mortgage. After all, it isn’t earning any interest where it is now.

I don’t expect to need the money anytime soon. If emergency funds are needed, I have a separate savings account.

Thanks,
— Donna Pay-Down

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Dear Donna,
Here’s how I come down on questions like this: If you expect to save more (after taxes) on your interest expense than you earn on your savings or investments (after taxes), then it makes sense to pay down your mortgage. Since your savings are earning little, this seems to be an easy question to answer: Pay down the mortgage.

I advise generally that seniors should avoid getting too aggressive spending retirement savings because the money might be needed later for health care or other expenses.

Remember that paying down principal doesn’t reduce the size of your monthly mortgage payment. It does have the benefit of shortening your loan term and cuts total interest expense. To reduce your monthly payment, you’d have to get the lender to recast your loan. When a lender recasts a loan, it doesn’t change the interest rate or the term, it just reduces the monthly payment to reflect a lower outstanding mortgage balance. It sounds like there’s no need to recast the loan if you are making the monthly mortgage payments without any problem.

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