What’s A Better Investment-Paying Down A Mortgage Or Investing the Money?

Written By: Sally R. Wax on April 17, 2010 No Comment

If you are retired or approaching retirement, one of the things you may be thinking about is whether you should pay off your mortgage. You may receive money due to retirement, or you may receive the equity from selling your family home and buying a smaller one.

What is involved in this type of decision, to put the funds to use earning more money, or to save money by using it for the mortgage?

The only way to make this choice is to sit down with a calculator and figure out the numbers. If you received, for example, a lump sum of $5,000 upon retirement for your accrued vacation and sick days, you may be faced with the choice of putting it into a CD or using it to pay down part of your mortgage.

You can find mortgage calculators on the net that will give you the savings you can achieve if you pay part of your loan off, but let us use paying off part of a 6.25% mortgage with five years left in the maturity, and you would save about $100 a month, or a total savings of $835.

In this same example, you can earn 2.5% on a CD, which would yield $657 over five years. In this example, the decision is easy: pay off the and pocket the $178. But what about the tax benefit you will give up from paying down part of your home loan?

However, you have to look at the total picture because you would lose any tax advantage from the home loan, and you would pay taxes on the investment. Does this mean that you should NOT pay down your mortgage with any excess funds you may come into? No, it means that you cannot only judge by the absolute costs and yields of each of the alternatives.

What if you are retired, and don’t have a large income to shelter any more? In this case, the savings from paying off the mortgage may be more to your advantage.

Another consideration is that CDs may not pay 2.5%, but rather only 1% or 1 %. This will change your calculation considerably. What should you decide? This analysis clearly teaches us that each situation is different and you have to do all of the calculations for your own situation.

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