Expert: Gary N. Hannah ChFC - 8/26/2002

Question
We are retired (62 and 65)and are thinking of refinancing our $92,000 7.5% mortgage to a lower rate.  We have 25 years left on the mortgage.  The other thing we are considering is paying off the mortgage with funds presently earning 3.2% in a money market account.  What are the pros and cons of doing this.  Paying off the mortgage would deplete our cash assets by 1/3.

Answer
Hi, Joanne:

If you have your living expenses covered from other sources of income, the decision to pay off the mortgage boils down to "peace-of-mind" and whether you can earn more by investing than you can save by paying off the note.

Some people find great comfort in knowing that the mortgage is paid off.  And few other considerations outweigh that.  For others, it is more of a financial calculation.

If you are getting 3.2% on your money market account (that seems high where the national average is about 1.1%, but maybe you are getting a special deal), that is a pretty good deal.  But your mortgage, even if refinanced to 5.5% will cost you more than you can earn over the near term.  That simple calculation says you pay off the house.

The risk in doing that is that interest rates may go up sometime in the future and you would be unable to capitalize on it because your capital is invested in your house.  

Or, you may encounter a financial reversal that could leave you wanting, in which case you could always re-finance the house then.  

Or you may need to take increasingly large amounts from your other savings to compensate for decreasing purchasing power over the years due to inflation.

But paying off the house does not mean you are cut off from the value of the house should you need it.  It is merely in another "pocket".  To get to it, you would just have to re-finance later, if you needed to.

I would pay off the mortgage.

Hope this helps.

Gary Hannah ChFC
Chartered Financial Consultant