Saturday, September 19, 2009

When Paying Off a Mortgage Is Not a Good Idea

By Ilyce R. Glink with Samuel J. Tamkin

Posted By Michael Rivezzo

Q: Looking at the numbers, it seems to be a good idea to pay off my mortgage. We have nine years remaining on a 15-year term at 5 percent and we owe $106,000. My home equity line is at prime. We plan to stay in the house for three to four more years. I know that a spike in inflation will change the interest rate on the home equity loan, but what do you think? Should we pay off our loan with the cash we have on hand?

A: It's a risk; if interest rates skyrocket and your financial position changes, you could wind up in a tight spot. You'll have all of your cash in your house but none to live on if you or your spouse loses a job, incurs unforeseen medical expenses or decides to make a change.

And in the current real estate and financial markets, if you want to take out equity from your home, you may have trouble doing that.

Because you're in a 15-year loan, you've already shaved down your interest rate relative to what a 30-year loan would have carried. Now you're mostly paying principal and very little interest.

Why not split the difference? Instead of paying off your loan entirely, why not pay off part of the balance? If you write a check for $50,000, you'll be left with just a $56,000 balance, and you should be able to pay that off with regular payments in perhaps five years or less.

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