Should I renew my CD or pay off mortgage?

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Originally Posted by CYKXBUT

Get out of the CD and invest the money. Any decent financial advisor should be able to get you way more than 5%. With a mortgage at 5%, do not pay it off.

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Agreed, however, it would depend upon how readily you need the money. If it's your retirement nest egg and you don't need it for more than 15-20 years, then for sure get out and definitely get into a mutual fund, but also make sure to continue funding the mutual fund a little bit each month to take advantage of dollar cost averaging. Do not panic when the market goes down, and be disciplined. The reason why many people lose money in the stock market is because they panic and do not have the discipline. Fidelity's Magellan Fund has averaged over 20% but many of their investors have only received less than 5%, why? Because they panicked and took the money out when it started to go down.

If you are worried about loss of capital then I would have a look at safer instruments such as municipal bonds or dividend paying cash value life insurance to take advantage of tax free withdrawals in retirement and the death benefit feature. Most importantly though, with mortgage rates as low as they'll ever go and the housing market still not totally rebounded (ie. re-sale value of your house), then the wise thing to do would look towards investing in a mutual fund.

Never in any situation would I choose to carry debt with excess cash available (other than emergency savings). The day I become 100% debt free (2.5-3 years I estimate) will be one of the happiest days of my life.

I can't imagine how awesome it would be to have my house paid off. That is going to be an absolute joy and if I am you I'd do it instantly. However my view of money and other's views are very different and I consider debt to be a monster that should be avoided at all costs.

Without having the numbers to do a pv calculation I would tend to go with Aeroclone on this one.

If you have enough money in the CD to pay off your mortgage either the amount you have in that CD is way high, or your mortgage is close to being paid off. If you don't have much left on your mortgage your interest that would be tax deductible is going to be rather low (if you even itemize) because as the mortgage comes to the end of it's life your payment is largely principle. If that's the case and your mortgage is costing you 5% it makes NO sense to keep an investment 2.85% instead of getting rid of the debt.

Second, 2.85% is not that good of a deal. If you're locking in a significant amount of cash for that low of an interest rate for 5 years you are doing yourself a disservice I would look into some highly rated bonds if you are risk averse. Since you seem to be coming up on the end of your mortgage I would guess you're closer to retirement than you are entering the work force so you still want to keep your money in some secure things like high rated bonds and treasury securities. I would keep away from stocks because you don't have time to recover if those go south and you're closing in on retirement.

On the limited amount of info you posted i'd say absolutely pay off the mortgage.

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Originally Posted by UNIGuy4Cy

Renew the CD, you can deduct the mortgage.

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Do you understand the deduction? I don't think you do. Even a 5% mortgage after the deduction advantage costs you more than the CD is earning. Pay off the mortgage would be my advise without knowing anything further.

Number one priority is to have cash available if needed. Don't pay it off if this is your available cash as you can pay the penalty and have cash. Most of the time on fixed investments your goal is to have the return on your money be 2% over the rate of inflation. I just read today that the rate of inflation is 2.3% with the core at a little over 1%. If you itemize and deduct the interest it depends what your tax rate is as to how good a deal this would be. It seems like a break even at best. Have you funded a retirement account and if you haven't start doing that now. The total stock market index mutual funds have returned between 6-7% so far this year depending upon their expenses. Food for thought. I'm no financial expert though.

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Originally Posted by Cydkar

Do you understand the deduction? I don't think you do. Even a 5% mortgage after the deduction advantage costs you more than the CD is earning. Pay off the mortgage would be my advise without knowing anything further.

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You nailed it.

First we don't even know if itemizing deductions exceeds the standard deduction. If the standard deduction is greater than itemized deductions the interest paid on the mortgage does not produce a tax deduction/benefit.

Even when itemized deductions exceed the standard deduction then that tax benefit would need to be compared to the negative interest spread from earning less on the CD than the cost of the mortgage.

Should I slap you now or later for having this "dilemma"? Dont pay off your mortgage but I'm not saying keep it in the CD either. You never know when you might need that money in the CD. If your house is free & clear you would still need to qualify for a loan later if you need cash, which would also cost you in closing costs. Keep the mortgage, your home is not necessarily gaining value either.

Personally, I would pay off the mortgage. As long as using the money in your CD doesn't completely drain any savings you have, I feel you'd be better served having the debt off your plate.

Some of this depends on your age too, but if you have plenty of time to invest I would definitely be looking at some blend of Mutual Fund/stocks to replace your CD.

There is another potential benefit to paying off your mortgage with your CD. Most lenders escrow for taxes and insurance. If you payoff your mortgage the escrow balance is yours. Most escrow balances have a two month built-in reserve, so even if your taxes and insurance are due immediately you will still benefit from not having your taxes and insurance escrowed.

Without knowing your specific details, I would pay off the mortgage.

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Originally Posted by clones26

Should I slap you now or later for having this "dilemma"? Dont pay off your mortgage but I'm not saying keep it in the CD either. You never know when you might need that money in the CD. If your house is free & clear you would still need to qualify for a loan later if you need cash, which would also cost you in closing costs. Keep the mortgage, your home is not necessarily gaining value either.

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Your response doesn't make sense in the enviroment of the last 30 years. Just about every lender under the sun will grant a line-of-credit against a house that is owned free and clear of debt. I had one against my house that I paid all the debt off. The line did not cost me anything unless I accessed it.

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Originally Posted by alaskaguy

Your response doesn't make sense in the enviroment of the last 30 years. Just about every lender under the sun will grant a line-of-credit against a house that is owned free and clear of debt. I had one against my house that I paid all the debt off. The line did not cost me anything unless I accessed it.

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Exactly. If you pay it off and you own the house in the clear and then run into an issue where you need some funds before you can build your savings back up, you can always borrow against the equity you have in your home. Though in all liklihood, now that you are without a mortgage payment, you should be able to pile up a nice cash reserve in the next few months to protect you from life's little surprises.

Just my personal opinion here but basically you have to determine what your investment goals are before you do any of this. For instance what level of comfort do you want to have for liquid savings, how much do you want to commit to paying down debt and how much along with how much risk do you want to do for more long term investing for the future. Based on that you can come up with a good balance.

I use this group to manage my long term investing: Foster Group, Inc. Financial Planning and Asset Management As part of their services they will actually sit down with you and analyze your net worth and help you come up with a "game plan" based on your financial situation and your goals. They'll even give you advice on your 401K and IRAs evne though they don't manage them for you. It was really cool to see them show you how much quicker you can pay off some of your debts by putting more down on 1 loan then after you pay that off using the money you had been paying on it on another line of credit how all your debt decreases a lot quicker than spreading it out over all your lines. For instance once my car gets paid off this year that money is going to the 2nd line on our house which really helps eat away on the principal balance on that when you are esentially paying several times more now in principal payment without even adjusting your budget.