Completely inappropriate question about financial matter

I currently own a home worth about $XXX. I carry a mortgage on it at 5.25% for about $YYY, which is much less than $XXX(the rest is equity). I have the cash to pay it off.

Is it better to own the house outright or to have a mortgage -- essentially borrowing money from a bank -- for other investments?

The choices I have are ...

Stay as-is.

Refinance entire amount for 30 years at 4.25%.

Pay some cash and refinance for a lesser amount, for 15 years at 4%.

Pay it off.

What should this little Kansas gal do?

P.S. I'm worried that my house might be destroyed by either a bad witch or a tornado.

--Dorothy

Assuming you will still have enough liquid assets (@2 - 3 times your annual expenses) after paying it off, PAY IT OFF. You are currently getting .25% (if that) on any cash in the bank. Paying your mortgage completely gives you 5% instantly, a huge credit boost, and flexibility for any future moves. There are tax implications to not having a mortgage interest deduction, but you'll live (and thrive).

I've owned my house outright for over 20 years and theres no way I would ever have a mortgage again. Being debt free should always be your goal. It gives you a lot of power and a lot more options. And you sleep better. I'm at a point now where if I can't pay cash for something, I don't need it.

Go ahead and pay it off. As stated, the only thing you might miss out on is the tax benefit of deducting your mortgage. This isn't as much of a benefit when you can afford to pay off your home, and thus not pay anymore interest. The amount of interest you pay is a lot more than the deduction you receive.

Further, paying off your home will allow you to use that money which is normally directed to your mortgage payment is a number of ways. My personal recommendation would be to look into buying additional, income-producing homes and/or income-producing commercial property. This way, the same mortgage payment that you are making now, you will still be making, along with the tax deduction, and cash income.

Quote: Ayecarumba

Assuming you will still have enough liquid assets (@2 - 3 times your annual expenses) after paying it off, PAY IT OFF. You are currently getting .25% (if that) on any cash in the bank. Paying your mortgage completely gives you 5% instantly, a huge credit boost, and flexibility for any future moves. There are tax implications to not having a mortgage interest deduction, but you'll live (and thrive).

These answers are great. OK then ...

Question though. I will have about 2 years in backup cash after it is paid off, but does that really matter? I mean, if I need cash, can't I just get a mortgage?

Altogether the outstanding balance on my mortgage is about 1/3 of my total net worth. Does that change anything?

I can't wait to march in and pay it off ...

--Dorothy

Personally, I would not recommend getting another mortgage and/or line of equity on your home once you have paid it off. The freedom of being out from under your mortgage on your primary residence is very uplifting, and to go right back under one is kind of depressing.

2 years of living expenses in quite a bit to have in "backup cash", but the question I would have is what kind of investments and retirement monies do you have? I'm not asking you to answer that question here. But it is something to think about.

If you have any reason to believe that you would need extra cash, beyond the 2 years of living expenses, within the short term, then definitely not paying off your mortgage is the way to go. On the other hand, if the 2 years of living expenses should hold you, then I would recommend looking into either a whole life insurance policy and/or short-term cash-producing investments, all dependent on your age and future outlook.

Speaking with a financial advisor would be a good idea to determine what you should do. Look for someone who is fee-based, rather than one who receives a cut of what you invest and/or a kickback from specific companies. A good financial advisor can outline your future, dependent on what you currently have, and what you'll need for the future.

Quote: DorothyGale

These answers are great. OK then ...

Question though. I will have about 2 years in backup cash after it is paid off, but does that really matter? I mean, if I need cash, can't I just get a mortgage?

Altogether the outstanding balance on my mortgage is about 1/3 of my total net worth. Does that change anything?

I can't wait to march in and pay it off ...

--Dorothy

Mortgage's take time to fund. You may find yourself in a situation where you need ready cash to pay unexpected expenses. Tornado damage to your home or car, unexpected medical emergency, bail...
Also, you may not qualify for a mortgage (loss of job, disabled, ill...) Hopefully, you will never need to dip into it, but if you ever do need it, you will be glad to have it.

The 1/3 total does not change anything. Assuming home prices have bottomed out, you are moving your worth from one area (cash) to another (property) while increasing your ready cash by cutting out the mortgage interest expense. Still a winning move.

Well, golly. I didn't think I'd be the only person taking this side of the argument, but here goes. Refinance. Refinance and cash out.

If you can refinance the entire mortgage at 4.25%, you should do that up to 80% Mortgage-to-value. Then you should take the resulting cash (if xxx-yyy>.8XXX) and buy the most aggressive portfolio of bonds that you can stomach. You can basically create a situation where the bond income pays the incremental mortgage payments plus a little extra.

In addition to freeing up more cash to invest at a rate higher than the one you're paying on the mortgage, you're also protecting yourself if your home is destroyed by lions, tigers, or bears. If your insurer refused to pay for some reason, you could (kill your credit rating and) stick it to the bank.

Even if you do opt to pay off the mortgage, I HIGHLY recommend opening a HELOC at the best rate you can find. That way, if you want/need to tap your equity the line is there waiting for you. It'll give you access to your equity much faster than applying for a new mortgage at that time, and presumably you'd only want to tap the equity in an emergency/time-sensitive situation.

Quote: rdw4potus

Well, golly. I didn't think I'd be the only person taking this side of the argument, but here goes. Refinance. Refinance and cash out..

In these uncertain times, its much better to own your home and hunker down than to expand your portfolio. Just my opinion. Peace of mind means a lot.

Quote: EvenBob

I've owned my house outright for over 20 years and theres no way I would ever have a mortgage again. Being debt free should always be your goal. It gives you a lot of power and a lot more options. And you sleep better. I'm at a point now where if I can't pay cash for something, I don't need it.

I hear that happens when you get old....