Weigh taxes before prepaying mortgage

Dear Dr. Don,
I have a fixed-rate mortgage at 5.75 percent with a loan balance of about $110,000 with 22 years left on the mortgage. I also have a sizable bond and CD portfolio. As my CDs mature, I'm seeing yields of 2 percent to 3 percent on new ones. Should I pay off my mortgage instead of reinvesting the proceeds?
-- Steve Selects

Dear Steve,
It's the most popular question sent in by readers; "Should I prepay my mortgage?"

My rule of thumb is that you should prepay your mortgage if the after-tax return on your investments is expected to be less than the effective (after-tax) rate on your mortgage. You can figure out the effective rate on your mortgage by using Bankrate's "Mortgage tax deduction calculator."

The more conservative you are in your investments, the more likely it is that it makes sense to prepay your mortgage by cashing in your investments. So it's pretty easy to decide whether to invest in CDs at 2 percent to 3 percent versus paying down a 5.75 percent mortgage. Just make sure you leave enough savings in reserve for a financial emergency.

There are two questions you should ask yourself, however. Does it make more sense to refinance your 5.75 percent mortgage with one at a lower rate? The length of time you plan to be in the house, coupled with the refinancing rate, influences whether or not it makes sense to refinance the loan.

Also, should you be this heavily invested in CDs? Your attitude toward risk influences how appropriate it is to invest in the CDs versus other investments.