Q. My husband and I are high-ranking military officers and will be retiring within the next five years. We have a $500,000 mortgage on our property and are about to apply for a refinance.
It occurred to us that this property certainly will be our retirement home and wondered whether it would make sense to pay down our loan by $100,000 or $200,000.
We have the savings to reduce the mortgage debt, and because the stock market is not doing very well, we think it might be a good place to put our money. Do you agree?
A. Paying down mortgage debt is always admirable and never a necessarily bad decision - but it also may not be the best decision. I don’t know enough about your situation to make any specific recommendation, but I can give you some things to think about.
Consider the following:
Recognize that taking money and putting it into the equity of your home is a long-term investment. The only way you can retrieve that money - besides selling the house - is to take out another mortgage. Therefore, the return on investment of the money you plow into the house is equal to the mortgage interest rate that you normally would have to pay had you not put the money in the house.
I see that today’s rate for a jumbo 30-year fixed-rate mortgage is hovering around 4.75 percent with no points or fees. Assuming the mortgage interest deduction won’t be abolished, the after-tax interest rate might be 33 percent lower. High-ranking military retirement income is good, as it should be. Let’s assume the after-tax rate is 3.25 percent.
So 3.25 percent is the return your money will make by dropping your mortgage balance because it’s money that you don’t have to borrow at 3.25 percent.
The question becomes this: Can you expect to earn a return of more than 3.25 percent on the money you would have put into your house? Though the stock market may not be doing well now, I believe it is likely to reap a better return over the long run.
It’s also important to look at your monthly payment. Will your income after retirement be sufficient to cover the mortgage without paying it down? If so, a mortgage isn’t a bad idea for the reasons stated above. If not, you will have to withdraw money to cover the payment, which could result in pulling money out of an investment at an undesirable time.
Ask yourself these kinds of questions. A good loan officer can give you options and help you determine the right amount of mortgage debt for you.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
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