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Paying off mortgage early with lump sum payment

An early mortgage payoff can net substantial interest

An early mortgage payoff can net substantial interest savings compared to making scheduled payments for 15 or 30 years. Photo Credit: iStock

Q: I have a certificate of deposit (CD) worth over $70,000. I wonder if is wise to take my CD out when it matures and pay off my house mortgage that has a current balance of about $70,000.

A: If you don’t need the money from the CD for emergencies or other uses that may come up and would otherwise invest the money again in a CD paying one percent or 2 percent and you’re paying 4 percent or 5 percent on your home mortgage, you may be making a wise decision.

While some experts believe interest rates will rise, your decision has to be what’s best for you. Those experts might want you to borrow as much as possible now or refinance as many of your loans now to low interest rate loans with the thinking that when interest rates rise, you will be paying back those low fixed rate loans with money that can be invested in other devices that can give you a return that will be above your mortgage interest rate.

Their view is if you borrow today at 4 percent interest, you might be able to deposit that same money in an account a couple of years from now that will earn 6 percent. You’d take no risk and make money to boot.

While that advice is sound, many homeowners might be better off using their money to pay down debt. Some borrowers will be tempted to use money they have to buy consumer goods or to spend the money and won’t invest that money for the long term. Others may keep the money in a savings account and until interest rates rise, they will lose money on that money. They will put money in a bank account that may pay no interest and yet pay 4 percent interest on their home loan. Effectively they will lose about 4 percent on that money. And, yes there may be some tax benefits and other computational issues, but the effect is the same.

At a very basic level, if you put money in one place and earn nothing but pay it out elsewhere and pay 4 percent, that money is costing you about 4 percent.

But if you need that money for expenses, emergencies, home repairs or other things that may come up over the next couple of years, you’re better off keeping some money on hand because as you might have noticed, it has become increasingly difficult to get lenders to give home equity loans or cash out refinance loans to borrowers.

That’s our personal finance advice for you in your situation, you can actually read other answers that we have given to other readers on our site on this issue.
 

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