by Benny L. Kass

Question: I am 71 years old and plan to retire a year from this June. I have been making extra payments toward my principle balance so that when I retire, I will have no mortgage to pay. This will give me $1,600 more in my retirement that I will not have to pay out to the lender. Is this a good idea?

Answer: This is a very tough question to answer, especially since I do not have all of the facts I need in order to give you a complete response. For example, how much money do you have in retirement assets, such as pension or 401(k) plans? What is your current mortgage balance? What are your plans after retirement? Do you plan to do a lot of traveling? Will you be spending a lot of money once you no longer have a full time job?

These are the kinds of questions which anyone facing your situation must review and try to come up with your own answers.

Let us assume that your current mortgage balance is $50,000. You probably have had this mortgage for a long period of time, and in that case, you are probably getting very little mortgage interest deductions from your monthly mortgage payments. As you know, when you first obtain a mortgage loan, a substantial portion of your monthly payments goes to pay down interest -- and thus you can deduct that interest when you file your annual income tax return.

However, after approximately seven years, the interest portion of your payments start to decrease, and more money goes to pay down principle.

I am not a believer that homeowners should have a house "free and clear" of any mortgage debt. There are too many elderly people who are, unfortunately, "house rich and cash poor." Their house is worth a lot of money, but they do not have the cash necessary to maintain the house -- let alone enjoy their retiring years.

Have you heard of the concept of "dead equity?" Let us assume that your house is now worth $400,000. Since your mortgage is only $50,000, your equity in the house (i.e. what you own free and clear) is $350,000.

While no one can predict the future, I am confident that real estate will continue to appreciate over the years -- although not as dramatically as it has done in the past two-three years. Assuming that I am correct, your house may go up in value at least three to five percent each and every year.

That means that regardless of how much equity you have in your house, it will probably continue to appreciate. That is what I mean by "dead equity." The equity you have in your house is doing absolutely nothing for you -- except perhaps giving you some peace of mind.

Many people, especially when interest rates are currently so low, are refinancing, and pulling out some of this dead equity. For example, if your house is worth $400,000, you can get a loan of up to $320,000 (i.e. 80 percent). After paying off your existing $50,000 mortgage, in my example you can have up to $270,000 to take home.

This money is not taxable in any way to you; it is your own money that you are taking out from your home equity.

Clearly, I do not recommend borrowing money at five or six percent merely to put it into a savings account which will only pay you less than one percent. Nor do I recommend that you speculate in the stock market. You worked hard for your equity and should not take the chance of losing it.

However, there are many safe investments which a competent financial advisor can recommend. And since everyone is convinced that mortgage interest rates will increase later this year, that also means that investment (savings) accounts will also increase.

In your case, I really believe that you should give serious thought not to pay off your existing mortgage. Take that extra payment and invest it somewhere. Indeed, if your mortgage interest is considerably higher than current interest rates, you may even want to consider refinancing as soon as possible, so as to take advantage of these lower rates while they last. You can either refinance just the amount of your existing mortgage or pull some additional cash out; that's your call.

Why do I suggest that you hang on to your current mortgage (or refinance)? Because down the road, if you need money for other purposes, you will have built up a nest egg with this extra money. And, you can always use this money to make your monthly mortgage payment, should finances get tight.

One other suggestion: have you considered obtaining a home equity loan? This is something that I strongly recommend. Under this arrangement, you get a line of credit and a checkbook from a bank. The bank will require that you sign a promissory note and a deed of trust (mortgage) and this will be a second deed of trust against your property.

But, you only pay interest if you actually borrow on that line of credit. In other words, it gives you a checkbook to keep in your desk which you can use for that rainy day, should it ever come.

Do your homework carefully. Try to determine exactly how much money you will need in retirement before you make the decision to pay down your mortgage. Once it is paid down, it may be too late.

Published: May 3, 2004

Copyright © 2004 Realty Times. All Rights Reserved.

Top of Page

View Archives >>

Top Insurers Pulling The Plug On Homebuyers Using Low-Downpayment "NINA" Mortgages