As I was traipsing through the Internet the other day, I stumbled upon a blog titled "Housing Panic," where I read an interesting post. The writer asked for anyone's thoughts on this question:
"Anyone thinking of cashing in stocks, bonds, 401(k)s, etc to pay off your mortgage instead? Say you have $200,000 in disposable financial assets, and a $200,000 mortgage. What do you do? . My goal -- rent 'til this sucker blows over, then buy my next house for cash. No more mortgages for me ..."
It's a question that many of us can relate to -- perhaps especially those who have already paid off a big chunk of their mortgage. Those with new mortgages might highly value the tax-deductibility of mortgage interest, but as your mortgage ages, you'll be paying less in interest and more against your principal.
So back to the question. Many readers responded, including one woman who said: "This is a really hot topic in my household, because my husband and I are in just such a position. The balance on our (15 year, 4.75%) mortgage is around $139,000, and we have about $350,000 in stocks and bonds (with another $80K in retirement accounts)." Opinions varied, with some people preferring to pay off the mortgage and others to keep it.
My own answer would be that for most people, it's smart to keep the mortgage. There's that deductible mortgage interest, for one thing. And then there's the low interest rate that most of us, by now, should enjoy. When your rate is low, such as 5% or 6% or even 7%, you can compare that with what you'd make in the stock market over the long haul, and stocks will generally win out. For example, if you have $5,000 in your pocket and a 5% mortgage, you can opt to put that money toward your mortgage, thereby avoiding spending 5% in interest on a chunk of your loan -- or you can plunk it into the stock market and expect to earn between, say, 6% and 12%, annually, on average, over the next many years. (The stock market's average is around 10% per year, on average, but in any several-decade-long period, it can vary considerably.)
I'd also point out that if you sold most of your stocks and funds and bonds in order to own your home free and clear, you'd better hope that your home's value doesn't go down. And then imagine that some emergency develops and you need to tap some fast cash. If you haven't any stocks to sell, you might need to take out a home equity loan. That's not such an odious option right now, but remember that interest rates have been creeping up. If they keep doing so, you might end up having to borrow money at 10% -- perhaps, at that point, paying more in interest than you're making in the stock market.
And finally, think hard about where your money is right now. If you're enjoying significant dividend yields from established, fairly stable companies, then that's a very reliable income stream, one that will grow as companies hike their dividends over time. Your home's value may drop. And even if it keeps rising, it might not do so as quickly as your stocks, funds, and dividends do.
If you're interested in home-buying and home-owning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates.
You might also want to check out these articles:
- Buying a House is Easy!
- So You Want to Be a Landlord?
- Make Money as a Landlord
- A Mover's Survival Kit
- 10 Things to Know About Mortgages
- 10 Home Enhancement Tips
And if you're in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some biggies:
- Capital One (NYSE:COF)
- Washington Mutual (NYSE:WM)
- Wachovia (NYSE:WB)
- Countrywide Financial (NYSE:CFC)
- National City (NYSE:NCC)
- Bank of New York (NYSE:BK)
- Wells Fargo (NYSE:WFC)
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.
