Should You Prepay Your Mortgage In This Economy?

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46 Comments

1. 

   pharmboy
   

   February 18, 2009, 23:23

   
   

   I think I lean a bit more towards the completely debt-free end of the personal finance spectrum.

   My wife and I paid off our mortgage 8 months after we bought it. However, we only had to borrow 63K on a 85K house (a lovely former “old lady’s house” in the rural South) so it wasn’t as hard to do. We still have 45K in student loans at less than 2% interest. I figured, if we hit hard financial times, it’d be easier to put student loans on hardship deferral than worry about mortgage payments.

   Our 401k took a beating like everyone else but luckily we’re young enough that we didn’t have much in it yet. I do take solace in the fact that if we hadn’t been focused on our mortgage, we might have put the extra money in taxable mutual funds and today we would have a reduced portfolio instead of our paid-for house (with a soon-to-be red front door).

   We’re are in a higher income bracket which made all this possible, but regarding emergence funds, it’s comforting to me that without a house payment, we could probably survive (not considering health insurance) on probably a $1000/month which I could make in any number of ways through simple manual labor.
2. 

   Andy Chilton
   

   February 19, 2009, 3:27

   
   

   Some of us have what’s called a revolving credit mortgage. Not all of it, but some of it. For example, 20% of my mortgage is in a revolving credit account therefore every single month I leave the extra from my account in there. This offsets the mortgage on which I pay interest (therefore pay less) and also doubly acts as my Emergency Fund.

   So you might be right, but under my circumstances, I probably won’t change anything in the current climate since my current situation is still right for me now.

   Interesting thoughts though
3. 

   Pinyo
   

   February 19, 2009, 7:16

   
   

   @Pharmboy and Andy – You both made good cases with different views. When I wrote this, I wasn’t thinking about someone who’s close to paying it off and could pay off the balance (as in Pharmboy’s case), or someone who has other types of mortgages than standard fixed mortgage (as in Andy’s case).

   The main point I am trying to make is that if you’re in a fixed mortgage situation and has large enough balance, then prepaying to save money on interest alone doesn’t make sense.

   Let me clarify that in the post.
4. 

   Mike
   

   February 19, 2009, 8:02

   
   

   Pinyo, I think you are right here. In fact I would take it a little further. In an uncertain economic environment, with interest rates so low, you can increase your liquidity by refinancing for a lower interest and longer term.

   This may not actually save you any money (if you have built up equity in your payment a longer term will increase the amount that goes to interest), but your ‘liquidity’ will increase because your payment will go down.

   The upside is that is provides some additional money to save/invest (presumably at a higher return) and gives you more flexibility in your cash flow.
5. 

   Curt
   

   February 19, 2009, 10:32

   
   

   Agree. But, it’s still a good long term goal to pay off your home and now is a good time to stategies how and when you can pay off your home. If you find an investment right now – like Gold – that goes up over the next few years, then you can use the increase to once and for all pay off your mortgage. That is my plan.
6. 

   Slinky
   

   February 19, 2009, 12:19

   
   

   I think it would make sense to pay down your mortgage if you’ve gotten underwater though. In uncertain times, it’s best to be flexible and having the ability to refinance or sell if you needed/wanted to would add a lot of flexibility in your choices. Otherwise, I’d still say it depends on where you are and where you’re going with your life.

   As a side note, it sometimes makes sense to prepay a bit of other fixed loans like student or car loans if it pushes off your next due date. That way, if something happened, you have the option of not making that payment for a few months.
7. 

   Ben
   

   February 19, 2009, 12:20

   
   

   I was prepaying my mortgage when it was 5.75% until I refinanced at 4.375%. I don’t think I’ll prepay at the rate I now have. Though I did see an advantage in the refinance because my payoff was less.

   There’s this interesting calculator Invest vs. Prepay where you can get a customizable answer to your situation:

   http://www.planningtips.com/cg....._invest.pl
8. 

   J
   

   February 19, 2009, 13:11

   
   

   You seem to be equating paying down a mortgage with investing in real estate, and comparing that to investing in the stock market.

   Paying down a mortgage isn’t “investing in real estate” … you already made that investment when you bought the house.

   Paying down a mortgage is investing in a bond. A bond with a guaranteed rate of return equal to your mortgage rate, and investment safety better than even a US Treasury, and with a rate better than just about any fixed income investment out there … especially when safety is accounted for.

   When considering investing in a taxable stock market account versus paying down your mortgage with that same money, ask yourself if you’d be willing to take out a home equity loan to invest in the stock market … because you’re effectively doing the same thing when you choose to invest in a taxable stock market account with money that could be used to pre-pay a mortgage.
9. 

   Ashley @ Wide Open Wallet
   

   February 19, 2009, 14:58

   
   

   I am a big proponent of paying extra towards the mortgage but I agree with you right now. If you don’t have a sufficient e-fund then that is #1 in this economy.

   Usually we send an extra $1,000 to the mortgage balance this time of year, but not this year. I’m keeping all the cash I can until the storm passes.
10. 

    Steve @ Start-Up
    

    February 19, 2009, 16:52

    
    

    If you’re deciding between paying extra on your mortgage principal and boosting your emergency fund, I would recommend the emergency fund. You never know when you might lose your job. If you’re deciding between paying extra on your mortgage principal and investing in the stock market, I would suggest the stock market route. The stock market is at an extreme discount. If you have a lump sum that would completely pay off your mortgage, I would go that route as it works like an emergency fund. Not having housing payments is awesome for if you get laid off. Or at least, that’s what I would do.
11. 

    smartmove
    

    February 19, 2009, 20:18

    
    

    I had been putting about 10% extra into our monthly mortgage until about a year ago and quit after reading a book on why this was not smart. I wish I could remember the book and author, but the reasoning did stick and I can really relate now. Lose your job and who is going to loan you money on your home, better yet what if your home is worth 20% less today than it was last year…If you have that extra in cash some where you sure are better able to weather the storm than with the cash in your home. I still have my job, house and about the same equity and value as last year (housing not as hard hit in Raleigh, NC). Now as for other debt, I can’t argue….Don’t won’t any of that. The house is enough.
12. 

    Scott @ The Passive Dad
    

    February 20, 2009, 1:32

    
    

    I think we would all sleep better at night if we didn’t have a mortgage payment, but it’s also tempting to put some money to work with the stock market at 6 year lows. What to do? I guess you could split the difference and put 50% towards principal and 50% in an index fund.
13. 

    Snowy Heron
    

    February 20, 2009, 10:51

    
    

    I think the idea of beefing up your emergency fund is a good one, although getting to a year’s worth of income would be pretty tough, and perhaps not necessary if your job does not appear to be in jeopardy and you have two incomes in your household. The biggest advantage that I see from paying off your mortgage early is that it would require you to have less income in retirement, and so you will end up being in a lower tax bracket then. And given the huge amount of debt that our “esteemed” members of Congress have just put us in, and their endless desires to increase our tax rates, I think that may end up being a better investment than anything in the stock market.
14. 

    abundance
    

    February 21, 2009, 15:29

    
    

    We paid off our mortgage in 2002. We have savings in the credit union that are sizable. We have paid cash for remodeling the home we own and a second professional degree for me. My earning capacity is high as is my partner’s.

    I won’t get into the debate of the financial wisdom of this but I will tell you that we sleep peacefully knowing that no bank or mortgage company’s melt-down can affect us. We are secure.

    Friends mocked us for saving in a conservative manner now we are sorry for them as they decry their disappearing retirement accounts.

    The “free-market” bubble has burst and many people are destroyed. Gratefully we are not one of them.
15. 

    Pinyo
    

    February 21, 2009, 20:16

    
    

    There are good argument from both sides here and thank you all for contributing your thought. I just want to clarify, based on some of the comments here, that I think it’s a good idea to pay off your mortgage early if you can completely pay it all off. However, I think it’s unwise to prepay your mortgage but not able to completely eliminate it. In this latter case, you have less of an emergency fund to support you in case anything goes wrong — i.e., losing your job due to the bad economy.
16. 

    J
    

    February 22, 2009, 11:54

    
    

    Pinyo, I don’t know of any reasonable personal finance writer who advocates paying down a mortgage prior to saving a comfortable emergency fund. This is not even an argument that needs to be made.

    However, you made another argument in your original post, and others made it in the comments as well: that one should consider investing in stocks in a taxable account instead of paying down the mortgage.

    This is tantamount to borrowing on your house to invest in the stock market, and no matter what you think of the current market valuation levels, this is a very dubious idea.
17. 

    Pinyo
    

    February 22, 2009, 12:16

    
    

    @J – Thank you for the clarification, but I don’t think the issue is as cut and dry as you have stated. Please take a look at my article about mortgage prepayment versus investing and let me know what you think.

    Just to sum it up quick, I don’t think the decision can be made wholesale and you have to carefully consider all the factors and implications on an individual basis. And I still believe that in this current economy and stock market condition, the pendulum has swung to favor building emergency/investing over prepaying your mortgage.
18. 

    AJC @ 7million7years
    

    February 22, 2009, 18:56

    
    

    It’s simple: over the long-term, any reasonable asset that you can purchase will appreciate in value at a greater rate than inflation; you want to have as large a pool of assets as you can afford the holding costs on (income less expenses, including interest).

    Therefore, you should be INCREASING your holdings by borrowing more, rather than DECREASING by borrowing less.

    Carve the current 5 years economic period out (simply by holding a 20+ year horizon) and you will find that this is the timeless ’secret’ to wealth … I don’t know anybody who has become richer over the long-term because they have paid off their mortgage early … do you?

    AJC.
19. 

    J
    

    February 23, 2009, 16:17

    
    

    Pinyo and AJC,

    So, you guys are maxing out your available Home Equity loans to invest in the stock market? Or perhaps you are refinancing your full home value at current low rates and pulling out equity and investing it in the stock market?

    Because when you have money that could go toward paying down your mortgage, and you instead invest it in stock in a taxable account … you are essentially doing the same thing.
20. 

    Pinyo
    

    February 23, 2009, 22:36

    
    

    @J – I can’t speak for AJC. I am too conservative to pull equity out of my home to reinvest; however I don’t prepay my mortgage preferring to use that money to build up emergency fund and investing in retirement plans. I think it’s a bit extreme to equate the two as being the same thing because they aren’t.
21. 

    Some Day
    

    February 24, 2009, 12:15

    
    

    For those who have a stable income, and some day would like to be mortgage free, a 15 year fixed rate mortgage can at least provide a realistic goal, while saving thousands on interest payments, compared to a 30 year loan.
22. 

    Pedro
    

    February 28, 2009, 11:25

    
    

    I copy here comments I posted @ frugaldad.com:

    Sensed but not explicitly expressed in some of these comments is the concept of utility theory.
    The “keep your mortgage and invest the difference” crowd correctly assesses the expected value of the stock market as higher, but they miss the concept that not all dollars are the same.

    Suppose you pull into a one horse town in the dead of night really needing a hot shower and a warm bed and the only motel in town charges $60 a night. This is great, since $60 is exactly what you have – problem solved.

    NOW suppose that as you get out of your car you are approached by someone you know to be an honest man with a proposition for you. This man likes to gamble, and he has a 6-sided die in his pocket. He bets you $20 that, if you roll the die, you will get a 1 or 2. This is an excellent bet for you: you have a (4/6) chance {you roll 3, 4, 5, or 6} of winning $20, and only a (2/6) chance (roll 1 or 2} of losing $20. This bet has a positive expected value of $6.67, and in a casino you would gladly play this game over and over again. BUT, you only have the $60 you need for your room in your pocket. If you lose, you’re spending the night in your car.

    The simple fact is that for a lot of people, falling X dollars short of having enough is MORE BAD than having X dollars more than enough is GOOD.

    This is how all well-designed insurance policies are sold – the expected value of the loss is ALWAYS less than the premiums – it has to be to pay claims, administrative expenses, commissions, and make a profit for the company. This is also why a football team with a 5 point lead with 3 minutes left in the game will play a loose “prevent” defense – giving up a 3 point field goal is ok if they still have more points (enough) at the end of the game, and better than playing a more optimal defense with a higher chance of yielding a touchdown.

    As someone once wrote, if you can’t swim, the fact that the average depth of a lake is 3 feet won’t help you when you’re in the part that’s 9 feet deep.

    Stock market, economy, housing price, and employment-wise, we’re in the 9 foot deep part of things now. I read daily about those poor folks struggling with the sudden drop-off, and I bet there are some quiet people with paid off mortgages floating calm and easy.
23. 

    LAL
    

    March 2, 2009, 13:07

    
    

    http://www.livingalmostlarge.c.....-the-home/

    I won’t be paying off my home, not just for liquidity but other reasons.
24. 

    baysailor57
    

    March 2, 2009, 17:42

    
    

    Last year I invested $ 400K in annuities and mutual funds. I now have about half that amount of money. (I have another $ 400K in a company pension fund, plus social security) Five years away from retirement with a stable job, I decided to pull most of the money that’s left in those investments and pay off my mortgage. Over the next five years we will put what we had been paying on the mortgage in CDs. Even at 2% interest, that will give us almost 7.5% growth on our money, if you figure the mortgage interest we’re not paying. I asked my financial counselor if he could guarantee that five years from now my annuities and mutual funds would have grown $ 100K plus 7.5% interest, and that my house would be paid for. He’s betting the market will more than recover by then: I don’t believe it. Five years from now I’ll have my pension and social security (if I don’t, I wouldn’t have the mutual funds and annuities, either), and I can live frugally on those and not have to make house payments. If I were 30 years younger, it would be a different story: I’d ride it out. At 57, I’m not willing to take that gamble and lose any more money.
25. 

    thomas
    

    March 3, 2009, 2:08

    
    

    heck no on paying the mortgage off early right now.
26. 

    Debbie
    

    March 3, 2009, 21:20

    
    

    So, I have a question for all of you – we bought our house in 2007. Too bad, because the market fell so badly after we bought our house, which we shopped and shopped for the best deal for. Our mortgage is at 5.6%. We had the opportunity through our lender to refinance at 4.75% (with closing costs) and decided to take it. But, they did an assessment of the property value and determined that our home has lost 20k (from 385k) in value since we bought it. Our lender said in order to continue to qualify for the 4.75% rate, we’d have to either a/pay PMI until we were back up to 20% equity, or b/pay towards the loan by another 15k to get our equity back to 20%. We’re tempted to do this, we have significantly more cash than this in savings accounts. But, I’m unemployed, and looking for work, we’re keeping our “burn rate” really really low, but the “what if’s” plague us… On the other hand, the rate adjustment along with the reduced principal, would lower our monthly expenses by about $500 – which would help us tremendously with our monthly cash flow.
    so i’m confused! What should we do?
27. 

    Pinyo
    

    March 3, 2009, 21:56

    
    

    @Debbie – Interesting scenario. I think it would depend on your current cash flow — is it positive or negative? Also, if you spend the $15,000, how much would you have left in your emergency fund.

    If you spend the $15,000 and still have decent size emergency fund left, and the $500 less in mortgage payment put you into a lightly negative or positive cash flow territory, then go for it!
28. 

    2million
    

    March 9, 2009, 22:12

    
    

    I am wrestling with this a bit myself. I know I will get a long term higher return if I invested in the stock market, but to help improve our cash flow I am looking to reduce some of our mortgage payments – cash flow is a little tight right now.
29. 

    Jason
    

    March 17, 2009, 0:08

    
    

    How about this:

    You’re young and healthy and buy a house.
    You also take out a par whole life policy for the amount you owe.
    You dump in extra money into the policy as you have it, buying paid up additional insurance.
    Dividends accrue within the policy tax-free.
    Depending on the interaction of the dividend scale and the amortization table, some time around year 15-20, you”d have the cash value sufficient to pay off the house completely if you want to.

    Maybe you don’t want to, though… if your policy is accruing tax free, and your mortgage interest is tax-deductible, you might not want to.

    Meanwhile, if you lose your job, you can borrow against your policy to make mortgage payments, with no underwriting and next to no paperwork.

    You can move with no hassle. Your equity is in the policy, not in your house.

    You get a tax free death benefit to your family if you die.

    If you become disabled, the insurance company will continue to pay your premiums. And you can use those dividends and premium payments to keep up house payments when you need them.
30. 

    fern
    

    March 26, 2009, 15:15

    
    

    I can see the logic in what you’re saying, but for me (someone who has no debt other than a small mortgage), paying off the mortgage in an accelerated fashion is part of my long-range goals, and if i invest the money rather than prepay, I’m just deferring that aspect of my plan. I can’t retire until I pay off the mortgage, and i plan to have it paid off in just 7 more years.
31. 

    fern
    

    March 26, 2009, 15:23

    
    

    My numbers, by the way, are as follows: balance on my mortgage, $65,000 at 6%. I would rather continue prepaying (with an extra $425 monthly) than shell out $4,000 or so on closing costs to refinance at a lower rate.

    My emergency fund has 3 months worth of living expenses, and i’m adding to it with an extra $700 monthly while i still prepay the mortgage AND fully fund my IRA and 401k.

    If i had to, i could pay off the full balance of my mortgage now with taxable invested savings (but wouldn’t want to)
32. 

    Pedro
    

    March 27, 2009, 9:38

    
    

    Fern,

    Was in a similar situation at the end of last year. When our mortgage balance dropped under 50k, we paid it off by borrowing the balance from our prime+0% (apparently a rare animal these days) home equity line of credit – swapped in the old interest rate for 3.25%. Check around and you may be able to get a no closing costs, prime + 1% HELOC if you try.

    Be aware that this is a variable rate. If you’re going to accelerate your payments enough to pay it off in a year or two, you should come out ahead. However, if you’re still planning to take 7 years to pay off, this might well be too risky.
33. 

    fern
    

    March 27, 2009, 16:37

    
    

    Thanks for your thoughts, Pedro.

    As a matter of fact the woman at the bank that holds my mortgage suggested i pay off the mortgage by taking out a HELOC. I didn’t like that idea at the time, but maybe i should rethink this.

    i guess the possiblity of my selling the house within the next 5 years really has no bearing on whether i do a HELOC, right, cus there’s no closing costs.
34. 

    Jake Riner
    

    March 28, 2009, 12:04

    
    

    Actually prepayment makes a lot of sense if your job is secure. Paying the house off is saving 5-6% on the loan. CDs, money market and bond funds are paying 2% or less. Instead of financing the income side of your investment portfolio, pay down the mortgage. It’s a no brainer.
35. 

    Pedro
    

    March 29, 2009, 16:41

    
    

    Fern,
    Minus: it’s a variable rate.

    Plusses:
    1) lower interest rate right now.

    2) should be able to do without closing costs

    3) should have a lower minimum payment. Your minimum mortgage payment is your mortgage payment, no matter how much you pay ahead. The minimum for a HELOC will be a function of your balance – interest only, 1.5% of the balance, etc. You want to find out what the minimum monthly payment is before you start.

    4) better payment crediting – mortgage payments are credited once a month, on the due date. HELOCs typically compute interest using your “Average Daily Balance” – if you get paid semimonthly, your midmonth payment will reduce your interest cost slightly. Even at the same rate, the Average Daily Balance calculation will save you a little money on interest.
36. 

    Michelle
    

    May 18, 2009, 9:50

    
    

    I’m having the toughest time trying to figure this out for my own situation. I’m buying a house that costs just a tad under what I have in savings. My interest rate is very low (less than student loans that I will start owing interest on and paying in ~ 3 years). Since I am currently in graduate school in the sciences, my income is quite low. I need to lower the amount I have in savings, otherwise I will not be able to claim earned income credit on my taxes. I would appreciate any advice or comments. How much do I actually need in an emergency fund, especially with a house? I’m very frugal and financially conservative, and I love how the total interest I’ve paid over the life of the loan goes down considerably by adding money to mortgage pre-payment. Thanks!
37. 

    Pinyo
    

    May 18, 2009, 11:52

    
    

    @Michelle – I hate to pay down low interest loan, but given your circumstance you may want to consult a tax professional would could do some calculations on your behalf to see which route is better.

    In your case, paying down mortgage and getting earned income credit may be the best bet since it’s “guaranteed money” in both instances.

    The rule regarding emergency fund doesn’t change 3-6 months depending on your comfort level. If you think the job market is tight and it might be tough to find a replacement income, then build up a larger emergency fund.
38. 

    Peter
    

    November 3, 2009, 23:31

    
    

    Pinyo,

    Due to the economy my twenty year business is all but finished. I am 58 and my health isnt that great. So now, i basically have no income and I dont look forward to working at Wendys if you know what i mean.
    So,

    My original mortgage was 60k, i only have 4 years left. So, I have about 100k in the bank. I am thinking of paying off the mortgage which is about 20k.I should do this right? Is there any reason for me to keep paying my mortgage especially in my circumstance?

    Thanks
39. 

    Pinyo
    

    November 4, 2009, 19:50

    
    

    @Peter – This is just an opinion and you should consult a pro. I think it depends on what you are paying in interest versus principal (and the resulting interest rate). Since you’re at the tail end, I assume most of your payment goes toward the principal. If it was me, I would hold on to my cash and just make the monthly for the next 4 years. However, your actual circumstances and other variables may invalidate this.
40. 

    Chuck
    

    November 8, 2009, 23:42

    
    

    I have a question about early pay off on my farm. Actually I own 2 farms, one with my primary residence, and the other is across the road from where I live. Estimating low dollar value, both are worth at least $600K. I owe 98K on my primary residence, and I’m not willing to give it up for the other property. I currently have 325K in my IRA. I am currently employeed but I’m really worried about the possibility of being unemployed. Therefore my plan is to withdraw probably 65% of my IRA to pay off my debt and own both properties free and clear. I can then start to contribute 15% to my IRA, which I have unable to do, with a shrinking cash flow savings near 2K. I realize the 10% penalty, and taxes must be paid. But I think it would be worth it in the long run. A REAL STRESS RELIEF. My age is 53, my wife is a school teacher, so her job is more secure than mine. All I read on the internet is what a horrible thing to do, to even consider paying off a mortgage, look what the stock market will do for you in the next 10-15 years. THATS A BUNCH OF HYPOTHETICAL CRAP. If I let things ride like it is, the stock market dives to 6500-7000 like we’ve seen it do, then I loose my job, look what mess that would be. In years to come when I decide to retire, I can sell the farm across the road if needed to supplement my retirement income. Back to my question, does anyone think this is such a bad idea? Oh, I probably didn’t explain the shrinking cash flow, I have my youngest child, which is in her junior year in college, apartment rent and her living expenses takes a chunk out of my paycheck. We didn’t save for our childrens education like we should have. This will end in about a year, but what I’m really concerned about is the possibility of being unemployed.
41. 

    Greg T.
    

    December 2, 2009, 22:35

    
    

    I’m surprised that no one mentioned that when you owe money, you are a ’slave’ to the lender. That applies to all debt, including mortgages. I paid off my house early because I don’t want to be a slave.

    Some other thoughts,

    – there is only one way to have a forclosure proof home – have no debt.
    – you can always go back into debt if you don’t like it.
    – in a bad economy, job losses are a big concern. I loose my job.. I won’t have to fret like everyone else about how will I be able to pay my mortgage.
42. 

    Robert T.
    

    December 9, 2009, 20:19

    
    

    There is not a single “right” answer for everyone. It, of course, depends on your individual financial situation and comfort with debt.

    I think pre-paying a portion of the mortgage or paying it off entirely only makes sense for most people after all other consumer debt is paid off and there is a very substantial emergency fund in place (8-12 months or more).

    I decided to split the difference. I used some of my non-emergency cash to pay down the mortgage, and the other half to invest. As others have mentioned, paying off, even a portion, of your mortgage principal is the equivalent of purchasing a bond with a yield equal to your mortgage interest rate. This is not a bad deal.

    I pre-paid about 30% of the principal on my mortgage. Now, each monthly payment pays down the principal balance by a couple hundred dollars more than before. Even without additional principal payments, the mortgage will be paid off in about 15 years, instead of 26. It will save tens of thousands in interest.

    Again, this only makes sense if you have a fairly stable job/ profession, don’t plan to move in the near future, and have a significant emergency fund.

    The peace of mind of owning your own home is worth something as well.
43. 

    DB
    

    December 16, 2009, 22:20

    
    

    I have a quick question.. How about paying off all or most of your mortgage payment from the HELOC. I have a 15 yr 5.375 fixed mortgage. I have 12 years left. Right now my payment goes 50% to principal and 50% to interest. I also have a HELOC which is below prime (2.75%, 20 year, 10 year draw). If I pay off all or most of my mortgage from the HELOC, my monthly payment goes down a lot and also total amount paid goes down. Should I do it? I am worried if my FICO score is going to be ruined. Also, I plan to get new mortgage to buy a place since I got married recently. My goal is to reduce monthly payment and prepare for a new mortgage. Is debt in mortgage vs HELOC treated differently by FICO? Any suggestion will be great help. Thanks in advance … DB
44. 

    Pinyo
    

    December 17, 2009, 23:22

    
    

    @DB – I don’t immediately see anything negative for doing this, but you should probably consult a tax advisor. You may be giving up tax deduction on the interest paid to HELOC when you do this, but comparing to the amount saved, it sounds like a win. As far as your FICO, I think it’s a wash, but I am not 100% certain.
45. 

    Robert
    

    January 1, 2010, 19:35

    
    

    I admire and enjoy all the knowledge shared in this site but none applies to our particular case. At our age, we are extra careful and afraid of any missteps. And so I will value to hear your opinion on whether we should or not pay off our entire mortgage.

    My wife and I are both retired from employment, now 65 yrs old & healthy on medicare, and no dependents. We don’t want to get employed anymore because we feel we have just enough saved to support us throughout our lives, hopefully.

    We’re living on our combined $22,000 per year SS retirement benefits and $8,000 per year interests income from $550,000 CDs (1.5%pa) and $50,000 emergency cash to cover our annual cash shortage. We’ll start drawing $30,000 per year for 5 years from IRA starting yr 2010. We are debt free except for our home mortgage balance of 275,000 30 yrs 5.875% fixed. We also have equity stocks worth $100,000 and will not anymore risk investing any of the $500,000 CDs.

    Our annual household expense is $60,000 which already includes $20,000 annual mortgage payment for principal & interest.

    Should we pay off the entire mortgage?
46. 

    Carlos
    

    January 21, 2010, 4:18

    
    

    @Robert, your CD’s are paying you 1.5% while you are paying the bank 5.875% for the mortgage. I would pay off the mortgage. By paying that off, you will reduce your yearly expenses by $20,000.