I was in a situation similar to yours. I’m 40 and had about as much cash on hand as you did. I make about 14K less than you a year, so it usually doesn’t make sense for me to itemize my deductions. I bought a house last June for $67K. I put 20% down and got a traditional mortgage. After moving in and getting some things taken care of (had to get a new boiler, etc.) and seeing the money situation, I’ve been paying the mortgage down in large chunks (including putting the first time home buyers money back into the house). When I first got the mortgage, every month well over $200 went to interest payments. I’ve gotten to the point where the interest is only about $30 a month, I only owe about 8K on the mortgage. Even if I just continue to pay what’s left on the mortgage every month (no extra), I’ve saved well over $44K on interest over the life of the mortgage. This has worked out very well for me, and I didn’t blow the nest egg in one chunk before figuring out how my expenses would be as a new home owner. Good luck!

Michelle

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?

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.

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.