I wanted to pay off my mortgage before retirement, but I have a better plan to get the most out of my savings – DIGIWIZ CENTRAL

I wanted to pay off my mortgage before retirement, but I have a better plan to get the most out of my savings

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Courtesy of Rebecca Chamaa

My husband is close to retirement, and we’ve been thinking about the continuing cost of a mortgage.We could pay off our mortgage now and be free from interest, but it’s not the best use of our money.Putting our money in a high-yield savings account will earn us more than the interest costs.

Because retirement from full-time work is on the horizon for my husband, we have started making plans that in the past seemed too far off in the distance to concern ourselves over. One of those plans is to pay off our mortgage in retirement.

Reducing our monthly bills is a sound financial plan since we will no longer have biweekly paychecks to cover monthly expenses. With this in mind, my husband and I refinanced our 30-year mortgage in late 2020. We paid off our 30-year loan and took out a 15-year loan to replace it.

Unfortunately, we will still be responsible for a mortgage payment for the first eight years of retirement. In July, I looked at our loan statement and noticed that we spent almost $300 in monthly interest even with the higher payments of a 15-year mortgage.

$300 is two weeks of groceries for us, so saving that amount would make a significant dent in our monthly bills. Seeing our interest payment made me consider taking part of our nest egg to pay off the remaining principal on our loan.

When I suggested this to my husband, he said, “Let’s run some numbers.” It turns out that paying off your mortgage might not always be the best financial choice, no matter how great that sounds.

I’ve dreamed of owning my home outright

I’ve lived with a mortgage payment almost continually since I bought my first house for $35,000 in 1989. Given today’s real estate market, I realize that is a stunning price, but interest rates were around 10% back then, and it was far more challenging to pay for a loan.

Since purchasing that first home, it has always been one of my dreams to own my home outright and not have to pay a large portion of my income for housing.

Our current interest rate is about as low as they get. We locked in our 15-year loan at 2.5%. Let’s say instead of paying off our mortgage, we took $100,000 from our retirement savings, put it in a CD, and blocked it for 12 months. Our bank currently has a rate of 4.35% for one-year CDs with interest compounded monthly, and the best CD rates at some banks are even higher. We would make approximately $360 a month on that investment.

That is close to $60 net positive when we deduct the interest we pay on our current loan. But the implications of paying off our mortgage don’t stop there. My husband and I also looked at the tax benefit of mortgage interest. The amount we pay in interest is a deduction from our taxable income. That deduction saves us even more money each year when we file our taxes.

I’m better off paying off a mortgage for now

Although I have always dreamed of living mortgage-free, it turns out that under the current terms of my loan and with interest rates moving higher for high-yield savings accounts and CDs, paying off my mortgage is not the best scenario for my finances.

Even though it means we will not be mortgage-free for some time, investing the money we have built up in our retirement account makes more sense to our bottom line.

Not having a mortgage payment each month would seem very freeing financially. Still, I lean toward the frugal side of money issues, so I will choose more money in my pocket now that interest rates for savings and CDs are attractive. I must admit that some dreams die hard, even if they don’t make the most sense financially. I’ll need to wait to be without that mortgage.

Read the original article on Business Insider
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