Should I use savings to pay down my mortgage?
January 19, 2012
Q: Should I use cash toward paying off my mortgage? I have $150,000 in a checking account earning 1 percent interest. I have $50,000 in stock, and I'm currently putting $2,500 a year into a retirement account. I owe $282,000 on a mortgage at 4.78 percent, and my house is valued at $500,000. My only other debt is a $25,000 car loan. I am 61 years old and single.
A: It's worth looking at the pros and cons of putting some of your savings into your mortgage, along with another possible alternative.
The argument in favor of putting some of the $150,000 in your checking account toward your mortgage is that this would allow you to instantly make up the gap between the 1 percent you are earning on your checking account and the 4.78 percent being assessed on your mortgage balance. So there is a clear-cut savings to be had by lowering your mortgage principal.
On the other hand, your house is already your largest asset, and not a very liquid one at that. You may not want to concentrate any more of your wealth into that single asset -- especially since you are at an age where you should be starting to line things up for retirement. In fact, a key question is whether you see yourself continuing to live in that house in your retirement years. Especially since you are single, you may want to ask whether you would be willing and able to keep up with the maintenance of a whole house in the long term.
The reason this matters is that if you see yourself downsizing your home in the years ahead, it probably isn't a good idea to sink any more money into the mortgage than you have to at this point.
If you do see yourself staying in the home for the long term, here's another alternative you should consider: refinancing to a shorter-term mortgage. At current mortgage rates, you could switch from your existing 4.78 percent mortgage to a 15-year mortgage at around 3.16 percent. The interest savings should be worth your while, and with a shorter mortgage you would be paying down principal more rapidly. This would effectively achieve your goal of putting more money into the mortgage, but in a less drastic way than by putting a lump sum of savings toward your mortgage balance. This more gradual approach provide benefits without reducing your liquidity, which may be a good fit since you are going to need some liquidity upon retirement.
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